With the financial crisis hitting its 10 year anniversary and stocks continuing to reach new highs, many clients have been reaching out to me with questions like “How far can we go?” or “Are we in store for another down turn?” Recently, my friend Andrew Adams, Senior Research Associate, put out this piece discussing whether we've reached a new market milestone – and does it even matter. I hope you enjoy
Depending who you ask, August 22 is either the day the S&P 500 celebrates its longest bull market ever or just another Wednesday in August. We're in the latter camp, since we think in terms of secular bull markets – secular meaning "of or relating to a long term of indefinite duration." That point about "indefinite duration” is important, because there is no time limit on how long the current secular bull market can last. Historically, secular bull and bear markets extend about 14 years, on average, but that does not mean each cycle is 14 years exactly. The 1982–2000 period, for instance, lasted about 18 years, but we only know that with the benefit of hindsight (others may argue that events like the 1987 Crash and the 1998 Asian Financial Crisis were actually bear markets).
A case could be made for a few different starting points of this current secular bull market, but staying consistent with how most people measure that 1982–2000 period, this secular bull market did not start in earnest until 2013 when the S&P 500 broke above its 2007 prior peak. Until that time, the market had only recovered what it lost during the Financial Crisis, and if we could go back in time to March or April 2009, most investors probably wouldn’t say that it felt like a "bull market" even though the low had already been made.
The point is that different people have different definitions for just what a bull market is, and it's really not that important in the grand scheme of things. We’re not sure who decided that a 20% drop from a previous high represented a "bear market," which is the criteria being used to say this is the longest bull market in history, but it makes little sense to us. A bear market is an extended period of time characterized by a general decline in stock prices, and trying to define it too precisely seems counterproductive. The decline in the S&P 500 from January 26 to February 9, for instance, took 10 sessions and lopped off 11.84% from the index. But what if that down-move had kept going another 10 sessions and the S&P 500 declined more than 20% before rallying back up to new all-time highs in the subsequent months as it's now done? Is that a "bear market" despite lasting shorter than some vacations? The reasoning makes even less sense when extended to individual stocks. Facebook reached an all-time high on July 25 and then one day later was down 20% – and we were seeing headlines that the stock had entered a "bear market." That was quick!
Even calling this the longest bull market based on that "20% decline” rule doesn't really work, considering in 2011, the S&P 500 briefly fell more than 20% from its previous reaction high, but was able to rally back before closing a session down 20%. Also, even though the S&P 500 itself never fell more than 20% back at the lows of February 2016, the stocks in the S&P 500 were down an average of 25% from their own respective 52-week highs (and the average Russell 3000 stock was down 35%). So based on the popular definition of a 20% down-move representing a "bear market," it was only a little over two years ago that the average stock experienced its last one.
Sure, it's semantics, but it can be dangerous if someone hears that this is the "longest bull market in history" and then assumes it must be close to an end. Bull markets don't die of old age; they generally end due to some combination of excesses and the economy deteriorating enough to depress corporate earnings.
We spend much of our time and effort looking for signs that the secular bull market is coming to an end, and we're just not seeing enough of them to worry right now. Case in point, the S&P 500 finally joined many other indices on August 21 by hitting a new intraday all-time high (albeit briefly), its first since January 26. Same for the Dow Jones Transportation Average and Russell 2000, which both closed at their highest levels ever. We have expected new highs to eventually arrive because that's what happens in a secular bull market, and now the S&P 500 has an almost seven-month base on which to build a new leg higher if it can continue its recent push.
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