Is a Bear Market on the Prowl?

As the current bull market lumbers on, one question is top of mind when it comes to making our annual investing forecast: Is this the year we’re going to predict a bear market?

A number of signs point in that direction. “What makes me most nervous is the longevity of the bull market, which will be eight years old in March, the second-longest ever,” says executive editor Manny Schiffres, who supervises our investing coverage. Immediately after President Trump’s election, the stock market rose because some parts of his platform—tax cuts and massive spending on infrastructure, for example—could lead to stronger economic growth. But other campaign promises, such as greater protectionism, “could damage the economy if put into effect,” says Manny. “Put it all together, and I’m more cautious than usual.”

But caution doesn’t necessarily equal a market meltdown, as senior editor Anne Kates Smith discovered while reporting our cover story. Anne racked up hours of interviews and a research file that was inches thick, and the consensus was that no bear market is imminent.

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Unfortunately, the future is far from clear. As Anne writes, “Whether the bull finds its way safely will depend on how well markets adjust to the new reality in Washington and whether they can make a transition from being driven by ultra-easy Federal Reserve policies to being supported by what must support all bull markets: rising profits across a broad swath of corporate America.”

What continues to cloud the outlook is a fog of uncertainty that has shrouded the markets for years. Back in 2010, I wrote in this column that “with confidence and certainty running low, we’re suffering from a huge deficiency of vitamin C.” Not much has changed. Worries about the new presidential administration, future prospects for regulation and tax reform—not to mention Brexit fallout and the 2017 elections in France and Germany—have sapped companies’ animal spirits. And although the easy monetary policies of the Fed and other central banks have continued to prop up stocks, they “certainly aren’t doing anything to revive” those spirits, writes economist Ed Yardeni (see Best Places to Get Investment Advice).

Opportunity knocks. What would it take to lift the fog? One thing that could go a long way, says Anne, is if people felt confident that “politicians are coming together to make the right decisions.” As unlikely as that might be, we still need to offer an opinion about where stocks are headed in 2017. Anne’s baseline forecast is to expect returns in the mid single digits—say 4% to 6%, including roughly two percentage points of dividends. But as one analyst observed, even in a muddling market, there are “opportunities for courageous investors”—in international markets, for example, and in health care and technology stocks, as Anne outlines in her story.

But even for “courageous” investors, discretion is still the better part of valor, so it pays to take some precautions. Manny’s advice is to keep your eye on your goals, your time horizon, and your personal tolerance for risk and volatility. You may need to make some adjustments—say, by reducing the percentage of stocks in your portfolio from 70% to 60%. Anne’s recommendation is that you stick with high-quality companies that deliver consistent performance.

My advice: Even though cash pays next to nothing, keep as big a stash as you need to feel comfortable, no matter what happens.