I think it is fair to say that this current economic cycle has surprised most, if not all, investment professionals.  Of course, that is what trillions of dollars of Central Bank stimulus will do to a cycle!

In this short piece, I would like to explore what are the odds of continued expansion, what might we expect as this market eventually tops, how deep the eventual bear market may go and where to invest when the air finally comes out of this expansion.

What are the odds of continued economic expansion?
  
I think the key phrase in this question is odds.  As you can see from the table below, we are already in the second longest expansion in modern times.

​If you have ever been to Las Vegas, you would then know that this run could continue but with each passing month the odds start to stack against you further and the house odds continue to improve.  In this case the house is the Mr. Market as we like to call him.
 
How might this current bull market end?
 
As we highlighted in our blog post entitled, Negative Naysayers Beware! (March 27, 2017), we believe the technical patterns are pointing towards a possible market move that could push prices higher into early 2018.   That move could take markets up an average of 22.9% from the January 2017 trigger for this technical signal.
 
We also pointed out that the bureau of labor statistics published a paper by Yale Professor William Goetzmann. In it, he showed that booms are rarely followed by busts. His study of 42 different stock markets from 1900 to 2014 found that booms are more likely to be followed by more booms.
 
In fact, Professor Goetzmann found that a stock market that’s doubled in the past year is almost twice as likely to double again as it is to get cut in half in the year.
 
The key question about this research becomes have we already seen our doubling.  ​After all the S&P 500 index is now at roughly 2400 from a 2007-2008 low of 667? I would think again you must factor in one more idea and that is that markets and economies run in cycles.  They cannot go up forever!
 
If we do go up some 22.9%+ over the balance of 2017 this might be just the kind of move we typically see at the top of markets, where they sprint upward to a top and then fall under their own speculative weight.
 
What does the cycle pattern look like?
 
A cycle in economic terms is periods of expansion that are followed by periods of recession or contraction.  Throughout the past 150 plus years there have many such cycles.
 
The average expansion has lasted 26-61 months and the average recession 11-22 months.
 
The markets tend to lead that same economic cycle by about 6 months.  If we look at a 20-year chart of the S&P 500 we see these cycles clearly in the bull and bear markets.

​I realize this chart is a bit small but you can clearly see the cycles from 1997 – 2001, 2001 – 2009 and 2009 to now.
 
We also took the liberty of adding two other features to this chart.  The first is the red bubbles.  If the current cycle were to end today, you can see from these bubbles that each cycle has gotten progressively larger.
 
The second addition is the blue dotted trend line.  This is where we believe markets could be drawn to when this current expansion ends and the bear market begins.  If this trend line does represent the next market bottom, we would be looking at a possible 70% drop in the markets from current levels.
 
Where does one invest while still profiting from the possible short-term market move upward?
 
As I wrote about in our post entitled, Recency Bias and its Effect on Preserving Capital (January 23, 2017), we believe the one place you do not want to be is in a purely Buy and Hold (passive) strategy when this bubble bursts.  Yet that is where most investors are rotating in search of returns today, while ignoring the greater threat that could come tomorrow and that is downside risk.
 
In that post we demonstrated that the way to invest was to have both passive and active strategies in your portfolio to the manage risk, smooth returns and enhance long-term returns.  It’s not one or the other, but both.
 
However, if you were to invest new capital today in the markets you would have to worry that we are closer to the end of the cycle than the beginning.  This would traditionally lead an experienced allocator to divvy up more of the pie to strategies that protect capital than purely try to maximize one’s upside.
 
Let me show you what I mean.
 
Let’s look at what performed well in the last two bear markets (2000-2002 and 2007-2008).
 
Let’s start with the 2008 market decline.  In this chart below note who made money while all other strategies lost money.

​The answer is the Trend Followers.  They have the ability to profit on both rising and falling trends.
 
Note, the average hedge fund lost money.  Maybe not as much as the S&P 500 index (far left), but they still lost money.
 
Let’s now look at 2000-2001.

In this period the hedge funds did better (middle bar), but the trend followers still did the best.
 
Funny, do you know who has done poorly during the last eight years of the current bull market.  You guessed it!  The Trend Followers.
 
The moral of the story is easy when looking at recent performance of any strategy to let one’s greed cloud one’s judgment.  I call this looking in the rear view mirror.

It is therefore imperative to balance that greed with good old fashion common sense and a little dose of fear.
 
Smart investors must be willing to be diversified and maybe give up some short-term gain to protect capital that then allows them to invest again another day.  They must also know where they are in the economic cycle and anticipate where best to position their capital.  

Let me know your thoughts in the comments section below.
​

There was an interesting piece in the Forbes January edition by Rob Clarfeld, a leading New York-based multi-family office, on the indicators that a wealthy family might benefit from upgrading to a family office.  

A family office is defined as a private wealth management advisory firms that serve ultra-high net-worth investors, according to investopedia.com. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. For example, many family offices offer budgeting, insurance, charitable giving, family-owned businesses, wealth transfer and tax services.

Rob Clarfeld's article does a great job of summarizing some of the motivations affluent families have for forming a family office or hiring an outsource family office provider, like InTrust Advisors.  To read this full story in Forbes Magazine...click here.

​Here are his glaring signs that you are in need of a family office:

1. Your direct knowledge of your family’s finances, goals and aspirations cannot meaningfully be recreated by others.
2. You personally coordinate everything: investment management, tax information, estate planning, document retention, property and casualty insurance, etc.
3. You travel often and have concerns over the handling and timing of financial matters in your absence.
4. You have retired and no longer have an executive assistant’s administrative support – or you have concerns as to the potential blurring of lines between your personal and professional lives.
5. There is no obvious future family manager. Your children are grown and their lives have moved in different directions. By “anointing” a successor manager, you may be laying the groundwork for future sibling issues.
6. Your files are an eclectic amalgam of current, relevant, dated, sentimental and useless data that only you can decipher.
7. You no longer want to deal with the financial minutia of life. 

If this describes you, we would love to answer any questions you might have about outsourced family office services from InTrust Advisors as a possible solution.

​We can tailor our program to fit your specific needs and we do not necessarily have to manage your liquid assets to provide this service.

Find out more by clicking here. ​

It was not my intention to write on the markets this month, but there have been so many poorly informed "negative naysayers" predicting a deep correction or a imminent 50% collapse in the markets, that I wanted to set the record straight.

So for the record, we are due for a bit of a pullback and we have been doing a sideways to down pullback most of the month of March.  So we are in the midst of that pullback now.  It has just been mild so far.  Some indexes, such as the small cap indexes, have been hit harder than others.

Unless the wheels suddenly fall off the economy or some kind of unexpected shock comes from somewhere else around the globe, I expect markets to eventually move higher. Possibly much higher.

So you must be saying to yourselves, how come you are now suddenly positive when you has been negative on the markets for much of the past few years?

The answer is that the charts and data are telling us to be positive.  For much of 2015 and 2016 we were in a big range and moving sideways.  In July 2016, we finally broke higher out of this range (not lower as I expected) and so far we have not looked back.

​Here is what we are seeing:

First, the charts are showing that long-term strength in the markets is still possible based on historical chart patterns (real historical precedent).

If you look at the chart (above), you will see that the top RSI indicator is now above 70 on this monthly chart of the S&P 500 index.  

The RSI indicator, according to Wikipedia, is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.  In other words, it is a momentum indicator.

However, you don't really need to know anything about this indicator to see that when it moves above 70 (as highlighted in yellow), it usually stays there for an average of 13.4 months, based on 1997 - 2016 historical data.

Notice we crossed the 70 level in January of this year.  So based on the average, you could expect this indicator to stay above 70 till January or February of 2018.

So what happens when the RSI indicator is above 70?

Usually the largest and most steep part of the stock market move occurs or as we call it the "melt up."  This is the point that the most money is made in the market's move.

So if we look at the past 5 times the market has risen above this level and stayed above 70 for more than 3 months, we find the following moves are possible:

So historically the market has added 22.9% on average in return for the 13.4 months it stayed above 70 on the RSI.

So based on this alone, I think the stock markets are headed higher, possibly much higher.  History would say we could look for a price target in the range of 2766 for the S&P 500 come January/February 2018.

​Secondly, the bureau of labor statistics published a paper by Yale Professor William Goetzmann. In it, he showed that booms are rarely followed by busts. His study of 42 different stock markets from 1900 to 2014 found that booms are more likely to be followed by more booms.

In fact, a stock market that’s doubled in the past year is almost twice as likely to double again as it is to get cut in half in the year that follows as you can see below.

My third and final reason that markets have further to go is a simple physiological one and that is no one is bragging about how much they earned on their investment portfolios yet.

No bull market ends without excess enthusiasm for stocks!

In my experience, this is the most hated bull market that I have participated in to date.

In fact, I have taken several calls over the past few weeks from clients where I have had to defend the markets in relation to the alternative bubble, real estate.  Somehow, in our boom or bust real estate market in Tampa, my average client is more excited about real estate than the stock markets, even though we have had a nice market run since mid-2016.  

How this can be when list prices per square foot are already at 2007-2008 bubble levels (see Real Estate - Is The Party Over?) and interest rates are on the way up is mind boggling to me?  Real estate is not only in a bubble, but it is also not liquid so it is not like you can press a button and get out of your ill-timed investment overnight!

But I digress! 

So no bull market ends without like enthusiasm for stock markets and we do not have that yet.  In fact, far from it!

One last thought, Stansberry Research is suggesting that Central Banks around the world are dumping cash and funneling their cash into equities and bonds.  This has already begun in Japan and Europe but they suggest that these actions could be followed by some 80% of Central Banks globally in 2017, including the U.S. Federal Reserve Bank (once their restriction against doing so is lifted by Congress).

Click here (http://lastbullmarket.com/bull_market_fb.html) to watch the entire Stansberry Research presentation.

Now obviously no one knows for sure what might happen, but I think there is a pretty good chance we will at least see an average move of 13.4 months and 22.9%.  If it "melts up"  all the better for our clients and investors.

Let me also point out that following a typical "melt ups" there always a "melt down" and this could also be a time of great opportunity and we are very excited about it.
​
So my advice is hang on tight because it looks like markets want to move higher and if the Central Banks around the world decide to increase their buying of securities due to global growth concerns, this thing could really take off!

​Let me know your thoughts.  Please leave a comment below.



Important Disclosures:
​
Past performance is not an indication of future performance and there can be no assurance that the above indexes will achieve results in line with historical results.  This blog post is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

The S&P 500 Index is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy.  It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex and NASDAQ.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

Nikkei is short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies traded on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the United States.