Smith: 2 ETFs Built For 2014

December 20, 2013

Views that this five-year rally is long in the tooth are short of the truth, Sage argues.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is co-authored by Anthony Parish, vice president of Research & Portfolio Strategy at Austin, Texas-based Sage Advisory Services, as well as Bob Smith, the firm’s president and chief investment officer.

Inevitably after a big stock rally, investors begin to worry about a correction.

The S&P 500 is concluding what looks to be its strongest year of performance since 1997, extending a powerful bull market that began almost five years ago. Nearing the end of the year, we hear one warning more often than any other: “This market rally is getting long in the tooth.”

Is it true that, as some say, the stock market has moved into bubble territory?

We tested that allegation by placing the current bull market into historical context. We found that this is nowhere near the longest rally since the inception of the S&P 500.

Below, we’ll explain why heading into 2014, we favor funds like the iShares S&P 500 Growth Fund (IVW | A-90) and the WisdomTree Japan Hedged Equity Fund (DXJ | B-45).

But first, a bit more about what’s wrong with views that this market rally is done.

The longest S&P 500 bull market began in 1990, and persisted, basically, for a full decade. But the current rally isn’t the shortest, either. The shortest bull market in the postwar era began in September 1966, and lasted just over two years.

As the table below shows, the average bull market in the postwar era persisted for 57 months. How old is the current rally? Exactly 57 months! It’s the very definition of “average.” So, allegations that this market is overextended based on the duration of previous rallies are simply incorrect.

Bull Markets Of The Postwar Era

Start of Bull
Market
End of Bull
Market
Duration
(months)
Beginning
Value
Ending
Value
Change in
Value
Jun-49 Jul-56 85 14.16 49.39 248.80%
Dec-57 Feb-62 50 39.99 69.96 74.90%
Jun-62 Jan-66 43 54.75 92.88 69.60%
Sep-66 Nov-68 26 76.56 108.37 41.50%
Jun-70 Dec-72 30 72.72 118.05 62.30%
Sep-74 Nov-80 74 63.54 140.52 121.20%
Jul-82 Aug-87 61 107.09 329.8 208.00%
Nov-87 May-90 30 230.3 361.23 56.90%
Oct-90 Mar-00 113 304 1498.58 393.00%
2-Sep 7-Oct 61 815.28 1549.38 90.00%
9-Feb ? 57 735.09 1805.81 145.70%
Average 57 137.40%

What about measuring the current bull market in terms of the magnitude of gains?

 

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