Investing in a 10 Year Rising Stock Market

It is hard not to feel very smart or lucky if you have made investments in the stock market during its 10 year bull run. Virtually all asset classes in 2019 increased in the high teens to more than 20% for broad market indexes. These are great returns especially when compared to risk-free CDs, which have earned 2% or less annually during the same period.

Most forecasts for 2020 support continuation of the current 2% GDP growth trends and a rising stock market. No recession or market retreat is foreseen. What could possibly go wrong?

Looking at Some Details

To the extent stock prices reflect the present value of anticipated future earnings, there seems to be a growing disconnect between stock prices and projected earnings. Especially for smaller companies. A cautionary analysis of 2019’s soaring market was written by James Mackintosh in the WSJ last Friday. He points out that the percentage of all listed companies reporting losses in the last 12 months is close to 40%. The highest level since the late 1990’s, outside recessionary periods.

Moreover, he cites another analyst who calculates that the proportion of US-listed companies losing money for three years also reached its highest point last year. The caveat in this second observation is that these are small companies which in total represent less than 5% of the market’s overall value.

Two thoughts. Almost all credit union member business lending is to small companies. And secondly, one of the eternal verities about market returns is “reversion to the mean.” That is average returns will revert to long term “normalized”values over time. Could 2020 be such a year?