Is the ageing bull market past its sell-by date?

Proinsias O’Mahony: Muted sentiment has lengthened the bull market

Market bears insist this ageing bull market, now the second-longest in history after celebrating its ninth birthday this month, is past its sell-by date.

However, Schwab strategist Liz Ann Sonders points to one good reason why this bull has been such a lengthy affair: suppressed investor sentiment. Bullish sentiment, as measured by the weekly American Association of Individual Investor polls, has averaged less than 37 per cent since the rally began in 2009. In contrast, sentiment averaged over 44 per cent during the prior 2003-07 bull market. Remarkably, net equity fund flows "have remained in negative territory during the entire bull market", notes Sonders.

Investor wariness was understandable. Stocks halved after the dotcom bubble burst in 2000; by 2007, the hardy investors who had kept the faith were finally back at breakeven only to then endure the biggest bear market since the 1930s.

Usually, investors become bullish a few years into a bull market, with markets peaking when everyone is exuberant and there is no one left to buy. That hasn’t happened this time.


The pervasive negativity "has probably lengthened the cycle", says Reformed Broker blogger Josh Brown. That's very relevant, because it means this ageing bull may not need to be put out to pasture for some time yet.

Dotcom redux in IPO markets?

Surveys may suggest sentiment is muted but signs of bubbly behaviour are becoming apparent in the initial public offerings (IPO) market, according to Topdown Charts head of research Callum Thomas.

Thomas points to data from IPO expert Prof Jay Ritter showing 76 per cent of US companies that went public last year were losing money. That's the joint second-highest percentage in history, and an "ominous" echo of 1999-2000 levels, "the sort of thing you typically see toward the end of a market cycle".

However, the data is less worrying than it appears. Firstly, more than four times as many companies went public in 1999 than in 2017. Now, bears might argue this merely reflects changed market circumstances – companies can easily raise money in secondary markets today, without the hassle of going public.

Still, Ritter’s data also shows the percentage of money-losing IPOs remained low between 1990 and 1998 only to soar higher in 1999 and 2000, when risk appetite went through the roof. In contrast, readings over the last four years – 71, 70, 68 and 76 per cent – have been stable. There has been a gradual increase in risk appetite but no explosion higher.

2017 was not 1999; 2018 is not 2000.

Tech rebound may be too far, too fast

There are some signs of excess, however, most particularly in the high-flying technology sector. Has the tech rebound been a case of too far, too fast?

The recovery has certainly been a rapid affair. The tech-heavy Nasdaq 100 is back at all-time highs after gaining 16 per cent in a month. Some of the gains, like Netflix (up 60 per cent in 2018) and Amazon (35 per cent) have been truly eye-popping.

As a result, the Nasdaq has enjoyed double-digit gains in 2018 even as the broader S&P 500 index has only eked out small gains. The relative performance between the tech sector and the S&P 500 has now "separated to historically rare levels", notes money manager and technical strategist Andrew Thrasher. The current outperformance is even greater than that seen before February's correction, when investors were piling into tech stocks. In fact, it's at levels unseen since 2009, says Thrasher, as well as mirroring extremes only briefly hit in 2007 and 2003.

Typically, such episodes are followed by periods of relative underperformance. Tech stocks don’t have to fall, says Thrasher, but the recent outperformance does not look sustainable.

After 18 years, tech stocks finally beat inflation

The Nasdaq may be soaring but the index's long-term performance is not nearly as exciting, LPL Research strategist Ryan Detrick noted last week.

At the peak of the internet bubble in March 2000, the index topped out just above the 5,000 level. The severity of the crash that followed meant it didn’t hit new highs until last year. Today, 113 new highs later, it’s above 7,000. However, it’s only just crept above 2000 levels if one adjusts for inflation, notes Detrick. In other words, the Nasdaq “has finally budged after 18 years”, delivering paltry real annual returns of just 0.1 per cent – not much compensation for a stomach-churning 18-year journey that involved a peak-to-trough loss of almost 80 per cent.

If you’re a glass half-full type, you might conclude stocks eventually come good, that investors get their money back after even the very worst of market crashes. Still, the bigger point is that it doesn’t really matter if you buy into a revolutionary technology that goes on to change the world – if the price isn’t right, you’re likely to endure a long, painful wait.