Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Thursday marks the eighth birthday for this current bull market, which is up over 250% since bouncing off the low of 666 on March 9, 2009. How remarkable has this eight-year run been from a historical context?
Stovall: It’s actually been quite remarkable, and for a couple of reasons. First off, it is now the second-longest bull market since World War II. The only other bull market to go longer than this was the bull market from the 1990s through early 2000s. That ended with the 49% bear market triggered by the popping of the tech bubble. Another thing that makes this bull market special is that it is the second most expensive since the bull market of 2000. It’s P/E right now on a trailing 12-month GAAP basis is at 25 times, second only to the 30 times multiple that we saw at the end of the tech bubble bull market.
EQ: You said in this week’s Sector Watch that calling this bull market unique would be an understatement. What are some attributes that make it so different?
Stovall: I think one reason it’s different is because we have posted the strongest cumulative return of any bull market that lasted eight years or fewer. At the same time, we did so with GDP expansion that was probably the weakest of any bull market since World War II. So it’s very interesting that prices expanded as rapidly and as dramatically as they did, yet it really was not supported by overall growth in the economy.
I think one reason for that is because the prior bear market at minus-57% was the deepest of any bear market since the Great Depression. The tech bubble shaved off 49% and the OPEC-induced bear market of the mid-1970s took off 48%, but the 57% pummeling was the worst by far. As a result, we ended up with much more of a V-shaped recovery during this bull market.
EQ: Despite its strong price performance and longevity, this bull market has faced more than its fair share of investor cynicism during the past eight years, and perhaps more than anything, has been known for its resiliency. What is the likelihood that it’ll make it to its next birthday?
Stovall: I think that there is a good possibility, or at least as I see it now. There’s an old saying that bull markets don’t die of old age. While that’s true, I like to add to the saying, they do die of fright. And what they’re most afraid of is recession. Now, the one thing we don’t see on the horizon is a recession. We’ve looked to several indicators, such as year-on-year housing starts, consumer confidence, a rolling six-month change in leading economic indicators, as well as the yield-curve (10-year yield minus the one-year yield). None of these indicators are in negative territory, which is what we would need prior to a recession.
So, while I don’t think a recession is on the horizon, we could get a pullback or even a correction at any point down the road. In fact, I think we’re overdue for a pullback, but at the same time, I believe volatility will likely be picking up as this bull market ages. Another thing that was unique about this bull market, at least in its eighth year, is we’ve only had 23 days in which the S&P 500 rose or fell by 1% or more in a single day. That compares with 85 such times in year eight of the other bull market that lasted this long. We only have one observation to use in year nine, and in that case, we had 95 such 1% volatility days. So, I would say, if history is likely to repeat itself, then I would fasten my safety belts because while a bear market is not likely to occur, a pretty volatile bull market extension will.
EQ: Not to stoke unwarranted fears, but to your point of bull markets dying of fright, we’re in a relatively calm market right now, but how quickly can those recession conditions materialize?
Stovall: That’s a good question. Just because these indicators are in positive territory now does not mean that over the next couple of quarters they couldn’t deteriorate quickly. The National Bureau of Economic Research and their Business Cycle Dating Committee, which is a group that formally identifies when a recession has started and ended, usually don’t tell us when a recession has started until six to 12 months after the fact. That’s why I think you have to look at the monthly and quarterly numbers in order to keep your finger on the pulse of this economic expansion. We could end up finding that these numbers deteriorate relatively quickly, and if that’s the case, then chances are it would be pointing to a recession.
