As this Bull Market closes its 8th year, the question is: how much longer will this cycle last? and how do we position ourselves for the inevitable Bear Market somewhere on the horizon? The S&P500 recently has hit new highs, breaking through the 2300 level. At writing, the S&P 500 is up 246% from its Bear market lows of 2009 and up 46% from the previous Bull Market highs of 2007. Good times indeed. There has been a great deal of media attention recently as stock markets in Canada and the United States hit these new all-time highs. New highs in stock markets are not new however, as the Dow Jones Industrials Index broke through 1,000 for the first time back in 1976 and, 40 years later, it has broken through 20,000. Over those years, there have been a great number of new high days to get from 1,000 to 20,000.
The flipside is the handful of Bear Markets over the last 40 years. Bear Markets are never fun; however they provide a wonderful opportunity to increase the performance of your portfolio over the long term. Adding to stock positions in Bear markets has been very rewarding for those willing to buy when stocks are out of favour. And so, as this Bull Market completes its course, stocks will be outperforming bonds and the rebalancing calls in portfolios will be to sell down stocks and re-allocate those funds to bonds.
Meanwhile, bond yields finally have started to rise in the Western World. Government of Canada 10 year bond yields recently have broken through 1.7% after being as low as 1.1%. US Government 10 year bond yields are up almost 1% to 2.42%. Meanwhile, German 30 year bond yields have more than doubled from 0.5% to 1.08%. The rise in the German rate may seem insignificant; however this relatively modest increase has caused the German 30 year bond price to lose approximately 15% in its market value for existing bond-holders. We are pleased to see bond yields finally starting to rise, as bond holders have been under-paid for lending their money over the last decade. To mitigate against the negative effect of rising bond yields on the market value of existing bond portfolios, over the last four years we have shortened the average duration of the bond portfolio closer to five years versus our normal strategy of 10 years. We also have been adding floating rate bonds and real rate of return bonds (indexed to inflation) to take advantage of these rising interest rates as this economic cycle matures. For a more information on bonds and bond yields, please visit Investor U.