January is named after the two-faced Roman god Janus, who simultaneously looked forward and backward. That’s a nice skill to have as we look to set or tweak our financial strategy for the new year and beyond.
So, where are the markets headed in 2017 and the coming years? Let’s look back a few years, Janus-like, for some perspective. A few centuries, actually, to the late 1400s and early 1500s.
This is the period in which Europeans made significant discoveries in the New World. What does this have to do with investing in the 21st century? A lot, trust me.
Investing for your future is a journey. The most important part of any journey is starting off in the right direction. All the important European explorers have one thing in common. They sailed west. Columbus went southwest and stumbled onto the Caribbean Islands. Others took more northwesterly courses and “discovered” places like Florida, and New Foundland. After the first few expeditions to the New World, folks realized that setting a westerly course held the best promise of success.
Those rewards weren’t guaranteed, of course, and came at great cost. Those who succeeded endured weeks or months of staying the course – regardless of perilous storms, horrible food and dreadful living conditions.
The same is true of investing. The potential rewards are out there. But you need to set a course if you hope to reach a New World of financial security. You don’t have to chart out every mile and day of the journey; the world changes too much for that to even be possible. But you should map out the big picture – the principals that will guide your journey and keep you on track through storms and unfavorable winds and other obstacles.
While there is no “West” in investing – a direction that promises of success — it is possible to identify trends that our portfolios can ride towards growth, just as the explorers’ ships rode favorable winds and tides. Identify past cycles and you can get a good sense of where we are now, and what the next several years might look like for each of the major areas of investment: stocks, bonds and commodities.
The following trends and cycles will be important in 2017 and beyond. The cycles tend to be very long — either up for many years with each major asset class moving steadily higher, or down for an extended period as assets drifting lower and lower.
So let’s look at these cycles. Then check the compass on your portfolio to make sure you have set the best course for your 401k, IRA and investment accounts.
Stocks tend to move in long cycles of about 12 ½ years. That’s the average for long term up trends. Down trends are equally protracted. Bear markets average about 13 years, costing investors about a 4% loss per annum.
Bull markets average about 15% gain per year. Right now we are just under eight years into a long-term bull cycle. So, we may have about four years left before this bull is exhausted.
Bonds run in even longer patterns — 29 years. Here we have to remember that interest or payments we receive from bonds are always a positive contributor to our bond holdings. That said, the price of bonds can fluctuate either up or down, depending on the direction of interest rates. Interest rates of 3% – 8%, give bond prices a tailwind if overall rates are going down, and a headwind if rates are going up. A bond bear market likely started this past summer when interest rates began to move up from historic lows.
Commodity cycles are right in between stocks and bonds, running between 16 and 20 years. When I’m talking about commodities here, I’m talking about the wide spectrum of commodity prices such as agriculture, metals, natural gas, coal, and oil. Commodity bear markets result in a 51% price decline on average. The commodity bulls average a 217% gain. We are currently in year six of a commodity bear that began in 2010.
This one has a long way to go — another 10 years or so, and it’s already down almost 50%. Remember, the average commodity bear pullback is only 51%, so we may be closer to a bottom here. Still, there could be several years of flat prices ahead.
If we punch all this data into our portfolio’s navigation system, it will set the following course: Own stocks for the next several years. Stick with short-term, high-yielding and floating rate bonds. And if you are going to own commodities make sure there’s a yield to create income.
Adjusting your investments to recognize these trends is akin to sailing West in 1500 – but without the rancid food and smelly shipmates!