Twenty years ago, my pregnant wife and I spent her due date in the right-field stands at Yankee Stadium taking in a game because the doctor said the baby would arrive late. That’s how I define the term “pregnant pause”: a period of relative calm before a major change. But I do think the stock market is currently experiencing its own version of a pregnant pause.
Even though our days are filled with market commentary, breaking news and a continued assault on our brains by financial media, there seems to be very little inertia. As discussed in several MarketWatch Trading Deck columns recently (mine and others), the headline market indicators (SP 500, Dow Jones Industrials, Nasdaq Composite, Russell 2000 Small-Cap Index) are all trading in ranges that have existed for two to three years.
This appears to be a pause before the U.S. election and other issues start to really dominate the second half of 2016. It also reminds me (and some industry peers I talk to) of two other pregnant pauses that occurred prior to the bear markets that began in 2000 and 2007. To satisfy my curiosity (and perhaps yours), I went back to those two time periods with the help of a neat little online tool (www.dqydj.com, which stands for “don’t quit your day job”) that was pointed out by a commenter in my last article. Just as we have had a pause near all-time SP 500 highs in the past 18 months, so too did we have this condition leading up to the worst phases of those two prior bear markets.
Note that the current period of 18 months will not end until this month ends. However, barring a gigantic rally over the next few weeks, the pattern of a severe flattening in returns following a long bull market appears in play again.
Naturally, this is one of many quantitative exercises we can do at this stage of the long bull market to argue either side of the bull/bear discussion. My point is not to take sides. I am a long-short investor who focuses on individual stocks for the “long” side of my portfolios. Stock market index returns don’t matter as much to me as they do to other people. But they do tend to mislead people, giving them a false sense of security or causing them to adopt “all or nothing” approaches to their investment management. Both of these can be counterproductive. By bringing this particular trend to light, I hope you will renew your focus on individual elements of your portfolio, and not let the movement of the so-called “market” lull you into complacency.