One significant financial streak was snapped last week, but another remains firmly intact. Stocks declined 3.7% in February, ending the longest consecutive months of stock gains at 15. At the same time, the economy continues to edge toward an even bigger milestone. In July, the expansion, which began in June of 2009, is set to become the longest since modern records began in 1854. This is an impressive achievement considering there have been 33 cycles over this period.
A long economic cycle has led to a long bull market for stocks (this Friday will mark the 9th anniversary of the financial crisis market low). With the last bear market now a distant memory, some unfortunate investor behavior has reemerged. One is that investors — seemingly forgetting the lessons of the past — are paying exorbitantly high prices for aggressive growth stocks (bottom right).
These stocks have continued to lead the market in 2018, but we believe high valuations mean they could face considerable risk during the next downturn. A second mistake is that some investors are abandoning defensive positions, including bonds. While we recommend that investors own less bond exposure today than they typically would, investors should maintain a measure of defense in portfolios in order to cushion losses during the next economic downturn (whenever that may be). In short, discipline, diversification, and rebalancing are as important now as ever.