Sucker’s Rally or Start of New Bull Market

 

By Jon Flynn

 

 

Mark Twain famously said that “History doesn’t repeat itself, but it does rhyme”.  So let’s take a look at how the Dow Jones Industrial Average performed during a similar period of time in our history, 1929-1932.  This was a period of time in our history when the stock market declined approximately 90% from top to bottom.  While I hate to draw comparisons to the “Great Depression”, it is true that since April of 2008, the collapse of the world economy thus far has actually been tracking worse than the collapse in the Great Depression.  Especially in terms of industrial production and labor decline. 

 

Government policy response however, both home and abroad, has been much quicker and much more aggressive.  Because of this response, the hope is that we’ll avoid “Great Depression II, The Sequel”.

 

This thundering world coordinated policy response has launched stock prices like a rocket ship off the bottom. Since the March 9th closing low of 6,547 on the Dow Jones Industrial Average, the market has rallied an amazing 34%.  World markets have followed as well.  So is this the start of a new bull market or a sucker’s rally? 

 

Massive rallies aren’t uncommon in market history.  Looking back at the period of 1929-1932 for example, we had at least five rallies of at least 20% or more.  Each time the stock market soared investors must have felt that things were getting better and that we were on our way to better times.  Unfortunately, each time hopes were dashed, and the markets went on to hit even new lows. 

 

My belief is that our future isn’t predetermined and that policy response can work.  So we aren’t necessarily destined to repeat the decline of 1929-1932.  However we need to be realistic about our current situation and use this rally to our advantage and prepare our investment portfolios for what may or may not come next.  I would use this time to talk to your financial advisor about:

 

Asset Allocation Strategy - Does your strategy still make sense given your tolerance for risk and ability to ride out a protracted bear market?  Do you have the appropriate distribution of stocks, bonds, and alternative investments?

 

Investment Portfolio Quality - I would look at each and every investment holding you have,  consider using this rally as an opportunity to move to stronger or more defensive opportunities.  For example, consider adding highly rated utility and drug stocks that pay predictable dividends.

 

Cash Holdings - If the economy continues to worsen and you become unemployed, will you have a secure enough cash position to get by without employment for an extended period of time? 

 

Will this rally continue or fail?  Nobody knows for sure, so it’s important to have a sober and realistic outlook and be prepared the best you can.

 

 

Though these dividends may be historically predictable, payment is at the sole discretion of the company and can discontinue at any time.

 

 

 

Jon Flynn is a Certified Financial Planner ^TM and owner of Flynn Financial in Eynon. He is a Representative of Securities America, Inc., Member FINRA/SIPC and of Securities America Advisors, Inc. Flynn Financial and Securities America are unaffiliated.   Mr. Flynn can be reached at 570-876-5015. Everybody’s situation is different and arriving at solutions can get complicated.  So always consult with financial, legal, and tax professionals before making any decisions.