The Most Hated Bull Market In History?Sep 18, 2018

A lazy summer day in late August marked an important milestone for the current US stock market rally. On August 22, it officially became the longest US bull market in history, reaching 3,453 days, stretching from it’s humble beginning on March 9, 2009. In recent years we had suggested that this bull market could very well break the previous record; specifically, because of the absence of investor or economic excess that usually kills bull markets in their later stages.

As the late Sir John Templeton said, “Bull markets are born on pessisim, grown on skepticism, mature on optimism, and die on euphoria.” With the exception of a few weeks in early January this year, we have spent most of the past 10 years dealing with investor pessimism or, at best, skepticism. Based on this viewpoint, this current bull market could go down as one of the most hated in history, which could possibly prolong the hibernation of that feared bear for a while longer. Here are some of the reasons we believe that might be the case.

Reason #1 – Sentiment/Valuation is not excessive

Investors still have deep scars from the 2008 financial crisis that has bred ongoing skepticism. This proverbial “wall of worry” has kept them well insulated from the level of euphoria that Sir John was always on the lookout for as an indicator that stocks were overvalued. The chart below shows how most of the media (and investors) have consistently underestimated the power of the current bull market, proclaiming it tired or nearing the end for many years now, while the market has just kepts going up.

This next chart also provides a clue as to why this bull market appears to be so unloved by many investors. Throughout the past decade, investors have continued to be risk-adverse and overly cautious to their own detriment. Investors in general have favoured bonds and avoided equities over the past decade, and as such have missed out on US equity’s 400%+ cumulative return with reinvested dividends!

Reason #2 – The economic cycle is steady

Similarly, a lack of economic excess have also played a critical role in the length of the business cycle, which has supported another key pillar of the bull market -- corporate profits. Instead of the “V-shaped” recovery that usually accompanies aggressive monetary policy, we have instead seen a more of a “U-shaped” recovery. Compared to past tightening cycles, this gave the Fed the opportunity to provide ample monetary accommodation over many years, and then begin to wind down this significant monetary stimulus at a careful pace.

Normally, provided with such monetary signals like negative real interest rates, consumers, businesses and government spending would grow sharply. This in turn usually leads to a rapid recovery in the economy that would eventually necessitate a tightening of policy. The recent Trump tax cuts have done the reverse, as they have provided a boost to fiscal policy which, combined with still easy monetary policy, has supported economic growth as inflation and interest rates rise towards more normal levels.

Taking a longer view at previous bull markets, it’s also notable how steady the current recovery has been. Looking at US real year-on-year GDP growth, we have been enjoying a period where growth has been reserved, compared to previous cycles where volatility brought higher highs and lower lows.

Conclusion

Investors have spent the past several years rationalizing why record monetary and, more recently, fiscal stimulus has failed to lift the economy, inflation and interest rates. Many investors claim economies are destined for secular stagnation due to excess leverage, globalization and a surplus of savings, but the reality may be that the shock from the 2008 financial crisis just needed time. As Reinhardt and Rogoff demonstrated in their important 2009 work “This Time Is Different,” severe financial crises can take a decade or more to see a return to normalcy. If this is indeed what we are seeing today, interest rates and inflation may continue to move higher, which means bonds could potentially have weak returns, and stocks may need higher profits to outrun the negative impact of higher discount rates and lower valuations.

Stephen Lingard’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.