Is this bull ready for pasture?
Ten years ago, almost to the day, stocks began aprodigious ascent that has been unceremoniouslydubbed “the most hated bull market of all time”.A sluggish and patchy economic recovery,expanded involvement of central banks infinancial markets and, of course, the long shadowof the global financial crisis have all conspired todarken what should have been a glorious time forequity investors. If stocks climb a wall of worry, asinvesting lore would have it, then they’ve beenforced to scale a rampart that even an ardentborder blockader would have to admire.
Not surprisingly, calls for the bull market’s endhave been frequent through the rise and havegrown more impassioned with each leg higher.To be sure, in very narrow terms the S&P 500’sclimb has been record-setting, with more than3600 days having passed since its last officialretreat of 20% or more. Failure to meet thisadverse milestone, however, is more the productof an exceedingly precise view of things than of aflawless period for equities. In fact, US stockshave fallen by 20% from prior highs on twooccasions over the past decade: from May toOctober 2011 the S&P fell by 21.6% and duringthe Christmas Eve washout that we justexperienced, the index breached the negative20% mark from its September high. Both of theselows, however, occurred in the midst of a tradingday and because they weren’t booked as closinglevels, doomsayers treat them as if they neveroccurred. While such analysis seems pointlesslyarbitrary and entirely backward looking, thedialogue surrounding it combined with lastquarter’s market plunge has undoubtedly luredmany investors away from their long-term plans,or at least left them wondering if things havebeen too good for too long.
Though the equity analysis we do in support ofour mandates is entirely focused on whereindividual companies are going and not wherethe broad market has been, the rising clattersuggesting that stocks will cease their climbbecause of some historical precedent has piquedour interest in the subject. With the help of amajor investment research house, we gatheredsome long-term – really long-term – data on theUS equity market to see where we mightpresently stand if, in fact, the investing past isprologue. The graph below charts the path ofAmerican stocks from 1871 all the way to the finaltrading day of the recently completed firstquarter. We’ve made two adjustments to thedata: we’ve plotted it in log terms to keep thecompound growth from shooting off the page(remember logarithms from grade 12 math??) andwe’ve used real returns, netting out inflation sothat stock gains in periods such as the 1980saren’t just a reflection of sharply rising prices foreverything in the economy.
As you can see, when we pull back the lens muchfurther than those who fixate on the next fewmonths, a fairly discernible pattern emerges. Overthe pastcentury and a half, equities have tended to move up in very long waves, which are separated by shorter, punishing downturns. Technicians often call these extended moves “secular” bull and bear markets, or periodswhere even substantial interim fluctuations occurwithin, but do not disrupt, an overriding trend. Acouple of points worth noting from the data:
The two post-war secular bull markets prior tothe one we might be in now generatedmassive returns for those who stuck with them;
Each of the ascents shown included severaldetours along the way which didn’t alter thedominant path, but which would havedefinitely tested investor mettle and stayingpower; the great 1982 to 2000 bull market,after all, included the crash of ’87, which was asjarring as it was brief;
Significant downturns have set the table foreach long-term bull market and the “lost decade” that began with the dot-com crash in 2000 was as severe as any of these declines.
Source: Macquarie Macro Strategy
What’s most notable about the graph, however, isn’t the grandeurof the currentmarket upswing,but rather howshort andinsignificant itwould be relative toits predecessors if itwere to end today.In fact, stocks couldtriple from hereand they’d still fallshort of theprevious secular bull market on an after-inflation basis. Does thismean that we’re necessarily going to enjoyanother 300% or more before the next extendedbear shows its claws? That’s impossible to predictand a fool’s errand to try. If one chooses to lethistory be the guide, though, the prudent coursefrom here may be much different than what gutinstincts or many talking heads are suggesting.
At the end of last year, we rolled our eyes as welistened to investment ‘experts’ claim to haveknown that stocks were due for a steep fall, withsome even doubling down to forecast that theDecember difficulties would mark the end of themarket’s climb from its sub-prime abyss. What wedidn’t hear was any of these gurus forecastingthat Q1-19 would be the best quarter for stocks ina decade ... which it was.
Over the past ten years, the principal thrust ofour commentaries has been positive, drawingattention to attractive valuations, robust earningsgrowth, and accommodative credit conditions,while downplaying the hobgoblins of moneyprinting, Grecian insolvency, Brexit, and countlessother distractions that were being citedas reasons not to invest. The underlying intent ofthis approach was to do all that we could to keepyou invested and on the plan, despite what was oftenan unsettling backdrop. This has been a winningstrategy through the past decade and we think itwill be equally fruitful in the years to come.