Can the longest bull market in history defy the doubters?
US bull market isn’t quite as extraordinarily long as it might appear
The current bull market could run for another two and a half years, according to JP Morgan. Photograph: Robert Nickelsberg/Getty Images
The US bull market that began in March 2009 last week became the longest in history. Does it matter? Is age irrelevant? Or should investors be concerned this ageing bull market simply cannot go on much longer?
The duration of a bull market is not nearly as important as fundamental factors such as earnings, valuations and interest rates, says Ritholtz Wealth Management’s Michael Batnick, but nor should it be dismissed as irrelevant. “It can affect investor psychology,” says Batnick, with some investors worrying stocks might be overdue a pullback given the current bull market has now apparently outlasted the famous 1990s bull run that climaxed with the bursting of the technology bubble in 2000.
A bear market is generally defined as a peak-to-trough decline of 20 per cent, although not everyone is agreed as to when market cycles begin and end. Some say the current bull market is not as old as it appears, arguing it began not in March 2009 but in March 2013, when stocks finally exceeded their dotcom-era peak. However, is it really credible to argue stocks were not in a bull market between March 2009 and March 2013, when the S&P 500 appreciated by 135 per cent?
It is credible, however, to argue the current bull may not be quite as it old as it might seem. The S&P 500 endured some very difficult moments in 2011, with the vast majority (69 per cent) of component stocks falling into individual bear markets. Indeed, the index itself actually fell more than 20 per cent – at its intra-day low on October 4th, the S&P 500 had fallen 21.6 per cent from its high point six months earlier. The index then rallied off that intra-day low, so that it was lower by 19.4 per cent by the end of the trading day – just shy of official bear market territory. Officially, the 2011 drawdown is deemed a correction rather than a bear market, but only because of a technicality. If one dates the current bull market back to October 2011, then it’s nowhere near being the longest on record.
Others argue the drawn-out correction that occurred between May 2015 and February 2016 was a bear market in many respects. True, the S&P 500 only fell by 14.2 per cent, but the median stock fell 25 per cent, notes Michael Batnick. Other areas of the market, like the small-cap Russell 2000 index and emerging market indices, got “destroyed”, falling 26 and 36 per cent respectively. The MSCI World Index, too, fell into bear market territory, as did most international indices, losing more than 20 per cent of their value.
Additionally, some observers, such as Bespoke Investment and Yardeni Research, say the longest bull market actually lasted 13 years, between 1987 and 2000. Recession in the United States and the Iraqi invasion of Kuwait in 1990 saw the S&P 500 fall 19.9 per cent over a three-month period, which Yardeni classifies as a correction rather than a bear market. An obvious question arises: if that period qualifies as a bear market, then surely the same is true of 2011?
Saying the current bull market is the longest in history requires that one lean on “a fairly simplistic and arguably unhelpful method for dating and classifying bull and bear markets”, as CNBC’s Michael Santoli puts it. Furthermore, the S&P 500 gained 418 per cent during the 1990s bull market, according to LPL Research, well ahead of the gains seen during the current bull market (about 300 per cent). Indeed, if one includes dividends, US stocks have delivered annualised returns of 10.9 per cent over the last 10 years – only slightly above the historical average, which is hardly indicative of an unsustainable bull run that requires substantial bloodletting.
Still, while Michael Batnick believes the current bull is not as old as it’s made out to be, he admits you’d be “hard pressed to find anybody who thinks we’re still in the early stages of a bull market”. The S&P 500’s cyclically-adjusted price-earnings ratio (Cape) is “as high as it’s ever been”, says Batnick, with the exception of 1929 and 2000. Some other valuation metrics are no less alarming.
The S&P 500’s price-sales ratio is as high as it was at the market peak in 2000 – the “scariest chart in our database”, says Leuthold Group chief investment officer Doug Ramsey. In fact, the median company’s price-sales ratio is more than twice as high as it was in 2000, says Ramsey, who illustrates his point using another chart he deems “unfit for a family-friendly publication”. In 2000, overvaluation was “highly concentrated” in the technology sector; today, it is “pervasive”.
Still, overvaluation alone rarely triggers a bear market. For that, a catalyst is required. Eight of the last 10 bear markets have been accompanied by recessions, according to JP Morgan data, but there’s little evidence of a downturn any time soon. “Ongoing economic growth has overwhelmingly favoured positive equity returns in the past, with high odds of positive returns and low odds of large losses,” Goldman Sachs said in a recent update to its 2018 forecast.
Only a quarter of US bear markets occurred during economic expansions, says Goldman, and stock returns tend to remain favourable until about five months prior to the onset of a recession, “highlighting the penalty for prematurely exiting the market in the absence of elevated recession risks”. That’s echoed by JP Morgan, which says about half the indicators it follows are suggesting markets are in mid-cycle rather than late cycle. The bull market could run for another 2½ years, it says.
Surging corporate earnings, too, are supporting the bull market. Second-quarter earnings have grown by 24 per cent and sales by 9.8 per cent, according to FactSet data, while a record 80 per cent of companies are beating estimates.
The technical outlook, too, looks relatively rosy. Typically, bull markets narrow before they peak, with the heavy lifting being done by a dwindling number of large-cap stocks. However, recent equity gains have been “largely broad-based”, say BMO Capital Markets. Oppenheimer analyst Ari Wald agrees, noting that the NYSE Advance-Decline line – a breadth indicator which measures the number of advancing stocks minus the number of declining stocks – hit new highs last month.
This breadth measure peaked before the S&P 500 in 12 of the 15 major tops since 1950, says Wald, with stocks tending to peak about five months after the peak in breadth. In other words, conditions favour the bulls for the remainder of 2018, at the very least.
Overall, it appears the longest bull market in history isn’t quite as extraordinarily long as it might appear. True, the bull is old, but bull markets don’t die of old age alone, to use the old Wall Street adage. Earnings growth and economic conditions don’t suggest a downturn is imminent any time soon, irrespective of the age of the bull market.
Returns “will likely not be as high or impressive as in the past”, says JP Morgan, but investors should continue to be wary of buying into premature obituaries for the ongoing bull market.