Please allow us to acquaint you with one of the most amazing people alive today. We struggle to think of any individual who has more completely dominated their sport, and done so not over years but over decades. The sport? Women’s Squash, of course.

Heather McKay won the British Open, effectively the sport’s world championship at the time, first in 1962 and then won it again every year for the next fifteen years. Imagine winning the world championship sixteen years in a row! Upon retiring in 1980 McKay was nearly undefeated losing only twice in nearly twenty years, both losses coming early in her career. As if dominating Squash wasn’t enough McKay won the American Professional Racquetball Championship three times in 1980, 81, and 84 and the Canadian Professional Racquetball Championship five times. She was also a member of the Australian Women’s Field Hockey Team in both 1967 and 1971.

Heather McKay’s accomplishments are so striking because of her ability to win consistently over time. As money managers we do not expect to see such consistent results in a competitive arena. We certainly don’t expect to see the stock market up year after year. Yet we finished 2014 with the S&P 500 up for an impressive sixth year in a row.

Tracking back to 1928 there have been two periods where the stock market posted positive returns seven years in a row or longer. Indecently those two periods were actually one long period separated by a slightly negative year roughly in the middle (1990). We think of the period between 1982 and 1999 as the Heather McKay of markets.

Regarding the probability of a seventh consecutive positive year for markets we don’t rule out the possibility that we could be in the midst of a second anomaly in a history of seemingly random ups and downs.

At this point some of our more statistically-minded readers may be wondering if our thesis is based solely on the idea that since we’ve enjoyed six years of positive returns in equity markets that we are due for a down year. In a word, nope!

Remember that the probability of flipping a coin “heads” seven times in a row is very different than the probability of flipping “heads” again after flipping heads six times in a row previously.

To illustrate:

• Flipping a coin seven times and landing on heads each time:
  2^7 = 1 in 128 or 0.7812%
• Flipping a coin heads six times in a row and getting heads on your next flip: 50%

Fortunately for investors (and contrary to the beliefs of some) markets are not merely a game of chance similar to flipping a coin. Characteristics of markets such as valuations make the probability of a streak continuing more difficult the longer the streak exists. Consider the average PE Ratio of the S&P 500 on January 1st going back 100 years: 16.02

Here are recent S&P 500 PE Ratios for January 1st of the previous three years:

• 2014 18.15
• 2013 17.03
• 2012 14.87

The estimated forward looking PE ratio for 2015 as of January 1st is 19.96. While this ratio is not wildly out of line by any means, it does signify that stocks are no longer cheap.

In addition to concerns over valuation we note that mutual funds, especially index funds have experienced massive inflows as of late. If the do-it-yourselfers are piling into stocks via low-cost index funds it may not yet be time to head for the exit, but it’s certainly time to locate the door.

Given current valuations and the headwinds we foresee in 2015 a seventh consecutive year of positive returns for equities is unlikely. Our firm is not abandoning stocks, we are however incorporating more defensive securities and allocations into our portfolios. Just in case it comes up tails.