Take a bow, Mr. Bull. On Wednesday, the current Bull Market passed the previous record holder, that being the famed and explosive Dotcom Bull. It’s been running now for 3,456 days, and counting. This Bull, which was born in March of 2009, has now had the longest run in American history, outlasting the near 10-year run from October, 1990 to March, 2000. The current Bull has gained over 330% during this record run in length, but still trails the Dotcom Bull in size. The Dotcom Bull gained well over 400% on its ridiculous record run. No Bull has ever made it to its 10th birthday, however.
A Bull Market is defined as one that rises 20% from its low, until it drops 20% from its peak, whenever that occurs. There are some technicalities in the measurement, because there was a 21% decline in 2011 from peak to trough, but it was an intraday low as opposed to be a closing low. The closing low was down 19.4%. It was really, really close. You can see why it’s an issue of technicality. It sure felt like a Bear Market. As investors, that’s really all that matters. Some people also consider the beginning of the Dotcom Bull to be 1987, after the Black Monday crash. Regardless of the technicalities, this record Bull run has been quite an accomplishment.
Bull Market rallies are driven by rising earnings. They usually start before the growth takes place, when the turn in the cycle is developing. The Stock Market is forward looking. Investors are often willing to pay more for faster growth, which is why the Price/Earnings (P/E) ratio can change throughout a Bull cycle. Corrections often occur when expectations get ahead of themselves or when events occur that trigger fears about a recession. When recessions do occur, the E drops and the P/E shrinks, usually resulting in a Bear Market. So far, this is the only decade that has not experienced a recession, as defined by 2 consecutive quarters of negative GDP growth. But the decade isn’t over yet…
This current Bull has been perhaps the most hated one in history, and investors have found reason after reason not to believe in it. But the Stock Market has gone up a lot; Like really a lot. All the while, confidence in it has been low. And it is now the longest in history. When you consider the ever-present political and geopolitical risks, coming off the Great Recession, it’s understandable. Every day there is something or someone that suggests the rally is coming to an end. That’s certainly the case today. But that has been the case from day 1. There was a great deal of pain incurred during the Financial Crisis, and though it’s been nearly a decade, the wounds still run deep. We indeed will never forget.
This is one of the major reasons why this Bull has lived so long, and why we believe it still has more to go. Throughout this cycle, the Market and economy have never been close to overheating. Earnings and economic growth have only recently accelerated. Once these trends reverse, the probabilities of a Bear Market will increase. Valuations today are generally average; not cheap but not expensive. Investor sentiment is still very tame, unlike other peak periods, like the Dotcom craze. The correction has done its job. Prices reverted to the mean, while earnings continued to grow. Most extraordinary is that S&P 500 revenues jumped over 10% last quarter to a new record high. Normally this far into an economic expansion, revenue growth tends to be half that. Earnings soared 25% last quarter, reflecting the strength in revenues as well as the cut in the corporate tax rate. This is the big reason why the Stock Market keeps going higher. The US remains the best growth story on the planet. It has attracted a lot of money from overseas.
Bull Markets don’t die of old age. They usually run out of time with constrictive monetary policy to prevent things from overheating. Or as stated on many trading desks: Bull Markets get murdered by the Fed. The Fed has been playing catch-up. Interest rates have been artificially low for a long time, and have only been rising recently. They are still too low considering the rate of growth the economy is experiencing. That’s why the Fed is expected to keep its rate hike campaign for the rest of the year.
We firmly understand that this Bull won’t last forever. The cycle will come to an end, and there are signs it’s not too far away. The rate of growth for earnings will likely peak this year, and earnings growth in general could even peak next year. 20%+ growth is unsustainable. Earnings are expected to grow 10% next year, still, not too shabby. The US economy won’t be able to maintain its current rate of growth either. The Market will sniff these out well in advance. 2020 is shaping up to be a total wildcard year. It’s a ways out, but we are studying developments very closely. For now, we still see more upside ahead. This Bull is used to chaos, concerns, crisis and volatility. In fact, it seems to thrive in this type of environment. It’s been the case from the very beginning. Realistically, that’s all this Bull knows.
Have a nice weekend. We’ll be back, dark and early on Monday.
Back to School with BFIC
Summer is over for kids. They are back in class.
We were back at it again assembling backpacks with school supplies for local school children in need. Together our team – with the added help of Mike’s daughters – packed 100 backpacks full of supplies. Each bag also included a personal handwritten note of encouragement for the upcoming school year from us. We couldn’t think of a better way to ring in the school year. Investing in our children’s future is the best investment we can make.