Rolling Recessions in a Bull Market

Since March 2009, the S&P 500 has advanced roughly 280%. With dividends reinvested, the return jumps to 350%. Those are fantastic numbers. Realizing that very few investors had been 100% in cash on March 8, 2009 and then invested 100% in stocks on March 9, 2009 at the bottom, let’s go back ten years near the highs. From October 2007 through the 55% drawdown during the Great Financial Crisis, the S&P 500 has gained +108% (dividends reinvested) which equates to a compounding rate of 7.6%. In real terms subtracting inflation, the real total return is almost 6% (below the long-term average for stocks of 7% since 1950).

On the chart below which depicts the S&P 500 percentage performance since the March 9, 2009 low, two periods are highlighted where the Index made no advance: January 2010 to October 2011 and May 2014 to February 2016. The first period lasted 20 months and experienced two drawdowns: -16% and -18%. The second period lasted 21 months and experienced two -12% drawdowns.

This is a reminder that markets don’t go up in a straight line and investing over the long run takes patience and sometimes a stomach for volatility.

Rolling Recessions

Much has been written about the length of the current bull market, the second longest in history at 103 months – only 10 more months to break the record. While the Index has had a great run and the economy continues to grow, there are many components (stocks, sectors and industries) that have not fared as well, especially during certain periods of time.

This week, we will highlight two sectors: energy and financials that can be considered as having recessions in the past 10 years while the overall market and economy grew (they are not the only two).

Below is a drawdown chart of the energy sector ETF XLE. An ETF is a basket of stocks and XLE is an ETF of energy company stocks. A drawdown represents the peak-to-trough decline during a specific period of investment. In this case, the XLE dropped -29% in 2011 and -49% from mid-2014 to early 2016. XLE still remains -33% below previous peak levels. As oil prices have been halved, the energy sector and an investor of energy companies has been in a recession.

Things haven’t been as bad in the financial sector, but in 2011 the sector ETF XLF sold off -34% and in February 2016 was down -23% (see chart below). As the overall market is hitting new highs, XLF is also hitting new highs.


As we approach 2018 and consider adjusting investment allocations for the New Year, we continue to be bullish and remain watchful for the next rolling recession. We invite you to give us a call at (415) 249-6337, visit or email us at if you have questions about how we can assist you in managing your investment accounts.


Kyler’s Report —

Danger in Consumer Staples

Consumer staples stocks have done very well over the last few years as investors have been drawn to their relatively high dividend yields and perceived safety. These companies own diversified portfolios of strong, recognizable brands that throw off stable income that can be paid out to shareholders. Investors have historically enjoyed these relatively high dividend yields along with healthy share price gains and relatively muted volatility – everything you could want in an investment.

In the face of all this, actual business fundamentals seem to be weakening.  Here are some select quotes from fiveWSJarticlesthatwere published over the last two weeks:

“Earlier this year Nestlé ditched a longstanding goal of achieving 5% to 6% organic sales growth after it missed the target for four straight years through 2016.”

“For decades, [giant food] brands controlled grocery-store aisles, commanding prime shelf space and funding expensive advertising displays. Online, however, the playing field is more level, as the internet has provided a quick, cheap and easy sales platform for newer, trendier food companies to reach consumers.”

“P&G, After Slight Sales Gain, Puzzled by Weak U.S. Consumer Spending”

“Food and beverage companies, even in indulgent categories, have “no choice but to respond to the growing consumer concerns of the consumption of added sugar,” said Rabobank analyst Nicholas Fereday.”

“Customers may be starting to shop for over-the-counter drugs in the same way they shop for groceries—with a keener eye for cost and content. This could be painful for consumer-health companies who thought they were insulated from changing tastes… Online price comparisons are more brutal and the consumer experience less easily controlled… Another problem is competition from private-label products. Drugstore copies of branded classics have been around for ages, but health-conscious consumers who are able to quickly look up product details on smartphones may be savvier about active ingredients. The risk is they don’t see much difference between generic ibuprofen and expensive brands like Pfizer’s Advil or Reckitt’s Nurofen.”

These companies, whether they sell household staples, food, or medicine, are running into similar problems – an increase in private label competition (i.e. sales from “store brands”), direct to consumer sales, consumer shifts to healthier products, pricing pressure from big customers, and more. It is not out of the question that future growth will be much slower than past growth, and we’re already starting to see those types of weak results.

This bleak outlook, paired with relatively high valuation multiples – shares of many large consumer staples companies trade at well over 20x earnings - means that investors in the sector need to be extra careful. Buying these stocks for their relatively high dividend yields and ignoring everything else could lead to very low total returns over time.


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Jeffrey Sweeney