Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Stocks have continued to gyrate recently as positive economic data seems to be countered by concerning political headlines this week, including the escalation of a potential trade war with China and a shakeup to President Trump’s economic council. Based on what you’ve seen, how would you describe market sentiment right now?
Stovall: In one word: cautious. I think investors are concerned because we have now entered into the 10th year of this bull market. Give us another six months or so and it will be the longest bull market since World War II. Also, with the revolving door that seems to have been installed at the White House, investors are feeling more uncertain about the ability of the administration to demonstrate solidarity and control of its own fortunes.
As a result, I think investors worry about whether the Republicans will be surrendering control of the House of Representatives during the mid-term elections. The closely watched Congressional election in Western Pennsylvania was a good example of a region that was carried quite easily by the President but ended up losing out when it came time to select a new representative. So, I think right now, investors are a bit cautious and nervous, and it all points to the uncertainty and the impact that it could have in the upcoming elections.
EQ: Last Friday marked the ninth birthday for the current bull market. In this week’s Sector Watch report, you looked at how the market has done since March 9, 2009. Just how good has this bull market been?
Stovall: This bull market has been very, very strong. We were up 312% since this bull market got started, which actually makes it the second-best performing bull market since World War II. The best bull market was that of 1990-2000, which gained almost 420%. So, from a cumulative perspective, it is the second-best along with the second-oldest and second-most expensive. Like the old Avis commercials, maybe this bull market will try harder.
EQ: So, we’re about six months and 100 percentage points away from the number one spot?
Stovall: Exactly. However, going back further to 1921, we do find the bull market that ended with the great crash of 1929 rose even further, up 395%. So, depending how far back you go, this bull market is either in second place or third place.
EQ: Dissecting this bull market a bit, which sectors and sub-industry groups performed the best for investors during this time? Is that typical of bull markets?
Stovall: Well, not surprisingly, all of the sectors in the S&P 500 posted positive price performances in this nine-year bull market. The best performances came from Consumer Discretionary, Technology and Financials. The worst performers were, not surprisingly, the more defensive areas like Utilities, Telecom and Energy. In a raging bull market, I guess you can understand why investors tend to gravitate toward the cyclical sectors at the expense of the defensive ones, which tend to hold up best during market declines.
In terms of sub-industry performances, we had four that posted more than 1000 percentage point increases. Internet and Direct Marketing Retail was strongest, followed by Real Estate Services, Broadcasting and Managed Care. Equally, we had four sub-industries that fell in price during this entire bull market, with Diversified Metals & Mining, Oil & Gas Drilling, Education Services, and worst of all, was Coal and Consumable Fuels.
EQ: Defensive sectors were the underperformers, but when you look at Energy and the metals groups, while they do have defensive characteristics, they’re typically more associated with being cyclical groups. Despite that, they were by far the worst performers during this run. Considering that Energy and metals have, for the most part sat out this nine-year run, does it make this bull market that much more remarkable?
Stovall: Yes, because of the lack of inflation. I guess you could say one reason is because there’s also been a lack of GDP growth. We have seen a 20% increase in real GDP on a cumulative basis in this bull market, which is actually equal to the median for all bull markets since 1949. Yet, it is certainly nowhere near the top. The best-performing bull market from 1949 to 1956 was the post-WWII economy that also eclipsed the Korean War, and there we saw near-40% economic growth, doubling this current bull market’s economic expansion.
We also saw similar growth in the 1990s through 2000s bull market. So, in some ways, from an economic growth perspective, this one did not do as well. At the same time, however, unlike auto drivers who act like jackrabbits coming off of red lights and thereby end up wasting a lot of their fuel, the same goes for this bull market. Because we did not see a jackrabbit performance in that we did not also get a rise in inflation to accompany it, as a result, we might end up being able to keep this economic expansion and bull market lasting longer than any other.
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