Old Age Isn’t What Ends a Bull Stock Market
The length of the run really doesn’t matter very much.
Bloomberg, August 17, 2018
Enter the query “How long is the longest bull market” in a Google search and you get 41.4 million results.
Investors will not find much of use in most of these results. It is the wrong question to ask. Perhaps a better inquiry would look something like this: “Why does it matter how long a bull market is?”
Do not underestimate the importance of this question; the alternative is believing that a bull market has some sort of a magical sell-by date, a preordained time when it will run out of whatever it is that made it go in the first place. Furthermore, the idea that investors should sell equities because a bull market is getting long in the tooth has been a recipe for missing out on lots of gains.
Better understanding the nature of bull and bear markets is the key to avoiding this error. The reasoning behind this matters a great deal; you should really spend some time thinking about better ways to define bull or bear markets.
The recent spasm of news coverage on the length of the current bull market has prompted us to revisit this issue. There are five areas worth considering about the length of bull (or bear) markets.
No. 1. Definitions are random and useless: I don’t know how else to say this, but the idea that a 20 percent decline indicates a bear market is a meaningless fabrication. Yes, we use a base 10 decimal system primarily because we have 10 fingers and 10 toes. I have never seen a satisfactory answer explaining who invented these defining figures or the thinking behind them.1
Why anyone would ever allow any specific number to play a role in their investing strategy seems both poorly thought through and foolish.
No. 2. What really constitutes a bull or bear?: I have given this question lots of consideration over the years. I prefer to define a bull market as:
An extended period of time, typically lasting 10-20 years, driven by broad economic shifts that create an environment conducive to increasing corporate revenue and earnings. Its most dominant feature is the increasing willingness of investors to pay more and more for a dollar of earnings.
Once you begin to think about bull markets that way, broad swaths of history make more sense. The postwar era, the 1980s and 1990s biotech, computing and semiconductor boom, and most recently the maturation of internet, software and mobile companies — all fit this definition of a bull market.
No. 3. Secular versus cyclical: If we actually are thinking about longer societal shifts and the impact they have on investor psychology, then we must acknowledge the regular short-term pullbacks that occur. I prefer to think of bull and bear markets in terms of both longer-term secular moves (eight to 20 years) and the shorter cyclical rallies and sell-offs within. Knowing one from the other isn’t always easy, though cyclical markets tend to track the business cycle.
Once we understand the role of short counter-cyclical moves within the context of longer-term secular markets, it becomes easier to put the regular declines in context.
No. 4. Ordinary versus post-crisis recoveries: We have discussed this a number of times before, but it is worth bringing up in the context of aging bull markets: Recoveries from financial crises are very different from ordinary recoveries from recessions.
The economics are very different. A postcrisis recovery is marked by slow and erratic gross domestic product growth, weak wage gains and disappointing retail sales. All of these have been prominent features of the recovery during most of the decade since the Great Recession ended. Another feature is psychological: Investors remain skittish for years after, a characteristic that’s almost like post-traumatic stress disorder. This goes a long way toward explaining what I have been calling since 2009 “The Most Hated Rally in Wall Street History.”
One can only imagine how social media would have looked from the moment of the 1929 crash through the 1932 Depression-era stock market lows and on to 1966 peak, 34 years later, when the Dow Jones Industrial Average finally kissed the 1,000 mark. If today’s market represents a similarly slow recovery from the depths of the more recent financial crisis, then it is conceivable that this bull market might have more room to run.
No. 5. Scare tactics: Finally, one cannot help but notice that during the past five years, every reference to the bull market as “long in the tooth” or “aging” or “tired” usually comes with a recommendation for selling equities, and buying whatever that person happens to be selling.
Scaring people into selling shares and buying other assets is great for commissions, but it does little to help investors wisely deploy their capital.
One day, this bull market will come to its natural end. We can never know in advance just what it will be that brings this about. But one thing we can be sure of — it won’t be because of old age.
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1. We all are familiar with a correction being a 10 percent decline, a dip being a 5 percent drop, and a crash being 30 percent or more. Nobody has ever satisfactorily explained the thinking behind these numbers, or showed data that proves it to be right or wrong. Its just an accept Wall Street legend, with no evidence to back it up.
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I originally published this at Bloomberg on August 17 ,2018. All of my Bloomberg columns can be found here and here.
