Long Term Bull Market: Keep Focused!
The interesting thing about a long-term Bull Market is that it continues to advance during a climate of concern and outright fear; climbing the proverbial ‘wall of worry’_ This anxiety compels most people to leave their money sitting in a bank or money market fund, earning almost nothing, while equity prices continue to gradually move higher. There are many causes for this worry, and one only has to watch a couple of episodes of the evening news to find a paucity of reasons to be optimistic, but we believe there is a deeper-seated foundation. After going through a decade-plus Bear market, most of us have become conditioned to believe that advances will only be temporary, and we will continue to cling to this belief, even as prices begin to seriously emerge. People simply cannot believe that the tide is actually changing in a very big way.
First of all, just to make sure we are on the same page, let’s define what we mean when we talk about a “Bear” or a “Bull” market. They last for a very long time. We characterize a “Bear Market” as a period where a major index like the S&P 500 fails again and again to set a new high. This lackluster period goes on for a very long time – at least a decade; typically, between nine and thirteen years. Our last Bear began in the year 2000 with the dot-com bubble, and the S&P did not decisively break through to a new high until 2013. more than twelve years later. When a Bear market first begins, investors are optimistic, but they gradually lose hope and confidence fades as time passes and stock prices repeatedly falter. By the time a decade has passed, they have become thoroughly discouraged and have decided that the stock market is generally a poor place to increase your wealth.
“Bull Market” (or Secular Bull Market) – Here, this popular index, the S&P 500, continually makes new highs starting gradually, almost haltingly, then gains momentum in the later stages. These usually last an even longer time; typically, between fifteen and twenty years. Stock prices begin to rise quietly as more savvy investors begin to see value. As fear abounds, markets continue to climb and unobtrusively make new highs. When prices drop in Bull Markets, they are sharp and fast. Falling prices come out of nowhere and keep the apprehension alive. But then they are over, and prices once again inexplicably begin to climb. In the early years most people just watch from the sidelines. The harsh reality is that a Bull Market does not, and will not, accommodate everyone.
When Bull Markets end there is general euphoria with buyers eagerly searching for their next investment. As difficult as this is, let’s try to put ourselves in the mindset of 1999, the height of the dot-com bubble. Technology companies were soaring as giddy investors celebrated, and when warned of excessive speculation, to assuage themselves, they began to say those four most dangerous words in investing, “This time it’s different!”
- August 1999, from a CNN Special Report – “Has technology, globalization, and free-trade come together to create a truly new economy, one that allows for strong growth and little inflation in the market’s future?”
- September 1999, The Atlantic – “Stocks are now, we believe, in the midst of a one-time-only rise to much higher ground – to the neighborhood of 36,000 for the Dow Jones Industrial Average” (at the time it was around 11,500, having already risen from 1,000 in 1982).
- November 1999, Fortune Magazine- Mr. Buffett on the Stock Market (one of the few pragmatic thinkers), “The most celebrated of investors says stocks can’t possibly meet the public’s expectations.” Shortly thereafter critics of Buffett labeled him a
- December 1999 – “It’s amazing,” said Jeremy Siegel, professor of finance at Wharton School of Business. “Every year we say it can’t be another year of 20 percent-plus (gains) — and then every year it’s 20 percent-plus.”
By the end of 1999, the S&P 500 had gained between 20% and 34% in each of the past five successive years. Why shouldn’t everyone be happy and optimistic? As the late Barton Biggs said, “A bull market is like sex. It feels best just before it ends.”
Would anyone argue that today we see an investment mood which is far removed from the heady days of 1999? The general outlook is one of worry and sometimes outright fear; i.e. these days caution reigns. So, why our rather bright outlook? Keep in mind that Bull markets are born in conditions of uncertainty and trepidation. If we could go all the way back to 1982 when that 18-year Bull Market started, you would find investor attitudes remarkably similar to those of today.
During the “dark ages” of our recent twelve-plus Bear Market, especially 2008 and early 2009, many companies went into survival mode. Business was not good, so they cleaned up their balance sheets, paid down debt, and reduced overhead. One of my clients, who has run a successful business said to me, “Mike, there are companies like ours who have survived the difficulty of the past ten years and are now in a stronger position.”
During this slow rise, negative soothsayers abound. Don’t give a lot of credence. They are always in attendance as markets begin a slow climb. Consider the following:
- There is an enormous amount of money on the sidelines currently invested in low-yielding instruments. It represents buying power when people tire of low returns.
- With interest rates on the floor, the cost to borrow and expand is
- Technological changes alone in the last fifteen years are
- Major breakthroughs in health – vastly improved cancer treatment and 3D bioprinters now capable of printing human
- Inflation and energy prices at lows we have not seen for years
There is always that handful of very bright people who do not feel obligated to follow popular crowd psychology. Although clearly in the minority, these studious and hard-working people are not influenced by majority opinion, nor do they feel the need for others to endorse or approve their decisions. These are the winners who always seem to reap the bulk of the rewards.
Bull markets have the sharp and fast pullbacks. They are endemic to every major upward move, but they will provide opportunities. This is not a time for a pessimistic outlook. The best time to invest is when it is an unpopular idea with others.