I have been fully invested the entire time. But I also recognize that, like every bull market, this one will also come to an end. Another bear market is lurking out there somewhere.
The last bear market took 53% out of the market over a 15-month period. It was brought on by a real estate bubble, risky mortgage lending practices and easy money. Nobody knows what will cause the next bear market, but we need to ask ourselves some basic questions to help us identify a possible approaching bear.
#1 - Is the economy growing, or is it beginning to contract?
For now the economy continues to grow despite the negative GDP print in the first quarter of this year. We just got the latest GDP number of 4%. This exceeded the consensus estimate of 3%. But we need to keep our eyes on the economy going forward.
We get economic reports every week and all of these reports are important because they give us the temperature of the economy at any point in time. Economies are either expanding or contracting. It is very important to know what phase we are in the economic cycle. This current cycle is getting a bit long in the tooth.
#2 - Is earnings growth slowing down for a broad range of individual companies?
We are currently in the middle of earnings season. We get great information from "boots on the ground" companies that are operating in this economy as opposed to the macro-economic strategists. So it is important to track earnings season. This quarter, some companies are reporting great earnings, while others are not doing as well. There are patterns being developed. I would give this current earnings season a grade of "B" so far.