Two Bears and a Bull go into a….


Weekly Market Commentary
Week of August 26, 2013

The month of August has not been friendly to investors in any of the major asset classes. Stocks have dipped and bond yields have climbed, pushing bond prices lower. And, with the rise in inflation to 2.0% (as measured by the Consumer Price Index), there is greater purchasing power loss associated with holding cash or money market investments.

The stock market is likely in the midst of another temporary pullback in a continuing bull market. However, other traditional asset classes may be suffering from a bear market that may linger. Many investors may not be sure how to proceed, since it has been a long time since we have seen the current combination of bull and bear markets among the three major asset classes.

Bull and bear market trends over the past 63 years reveal that the current environment is most like that of the 1950s, when stocks were in a bull market while bonds and cash were in bear markets [Figure 1].


So while the current market combination is rare, it is not unheard of. Nor has it been a fleeting or fragile one. For nearly the entire decade of the 1950s, stocks remained in an upward-trending secular bull market while bonds and cash were mainly in a bear market. That is potentially an encouraging sign that this pullback in the stock market may offer an attractive buying opportunity as the bull market resumes.

The Federal Reserve’s (Fed) communications on tapering their bond purchases has resulted in bonds entering a bear market. This may continue in the coming years as the Fed ends the bond-buying program. At the same time, the Fed is likely to keep cash yields pinned down with no interest rate hikes likely for at least a year or two, maintaining the bear market for cash. However, we are likely to avoid the ugly triple-bear markets of the late 1970s, where soaring inflation weighed heavily on all markets. Inflation remains tame and stock market valuation (measured by the price-to-earnings ratio) is below all prior bull market peaks over the past 63 years, suggesting the potential for further gains ahead along with modest economic and profit growth.

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