Goldilocks: "This one's just right."
It was a robust year for equities of all origins. Globally, both developed foreign and emerging markets equities outpaced the S&P 500, as did the Dow Industrials and Nasdaq here on the domestic front. Relatively speaking, U.S. small cap stocks were the laggards of the broader equity markets but, historically speaking, gains this year were still well above their average. On a total return basis, the S&P 500 has now posted 14 straight months of positive gains. Presently, the longest such period on record is 15 months (March 1958 to May 1959).
Active is Bound To Find More Favor
Trends can have a major impact on how well investors following a particular investment approach or discipline perform during those times. If you are on the same side of the trend, then the trend is your friend and your approach is known as being “in favor.” If you’re are on the opposing side of it, the trend is your foe and you are “out of favor.” An example of this was in the late 1990’s when when value went out of favor and renowned long-term value investor Warren Buffet’s Berkshire Hathaway lost about half of its market capitalization.
Bull Market Crossroads or Conundrum?
Now in its ninth year, the current bull market is the second longest in U.S. stock market history, and could soon be claiming the number two spot in the biggest gains category as well. It's true that bull markets don't die of old age. It is typically a looming economic recession or a recession in corporate earnings (or a combination of the two) that ultimately brings them down.
Passive Indexing Mania—Watch Out!
It is amazing how quickly investors can forget about the dangers of manias and the consequences of the bear markets that typically follow them. When the Nasdaq-driven dot.com bubble burst in March of 2000–just over 17 years ago–the S&P 500 lost 49% peak to trough. The Nasdaq itself lost 78%. The losses in those indices require gains of 96% and 455%, respectively, to get back to where they left off.
Bull Continues, Anomalies Abound
At the time of our last writing, we were waiting patiently for the S&P 500 to make a new high and confirm that the bull market was still alive, after dual double-digit corrections brought it within arm's reach of bear territory. Indeed, the U.S. blue chip index did break its May 2015 record closing high of 2131 in July, ending a more than 13-month drought. From there it continued to advance through mid-August, when it notched its current all-time high at 2190. The action since then has been eerily similar to the start of that last go around, with the index fading its highs.
Active Investing is About Anticipation and Adjustment
Many people think that in order to succeed in active investing you have to be very good at predicting the future movements of asset prices. That is a misconception, if not a fools' errand, as there is no crystal ball. The role of a active investment manager is to constantly reconcile the changing risk and reward relationships of assets by anticipating outcomes, understanding their probabilities, and then making timely adjustments when they begin to bear out.