Five Hundred Twenty Five Thousand Six Hundred minutes. As the cast of Rent the musical adeptly describe in their hit number, it is one way to measure a year.
So, what is there to say about Three Thousand Four Hundred Fifty Three days? As of August 22, 2018, it is officially how you measure the longest bull market in recorded history – and counting.
From the systemic lows felt globally nearly a decade ago, the bull market that started back in March 2009 is now officially the oldest bull market ever – topping the duration of the bull from the 1990s.
Any time history is made, it is natural to ask ourselves: how did we get here and what is coming next? Well, to the former, the U.S. took drastic measures to temper one of the most severe shocks ever felt by our economic system. The Federal Reserve took short-term rates to nearly zero. The Fed also bought vast amounts of long-term debt, the effects of which kept the long end of the yield curve down. Taking rates that low for that long had never been done before. Coupled with multiple rounds of quantitative easing, we had created an extremely pro-growth environment.
Over the last few years, some analysts began focusing on their “market clocks” and started calling for some sort of correction. As human beings we like to see patterns in things that have happened in the past and extrapolate them into the future, like the types of market cycles we read about in our economics textbooks. In baseball terms, the continuing bull run caused some to believe we were much past the seventh-inning stretch, and closer to the bottom of the ninth. Instead, the market has overcome each potential pitfall – criticism of non-organic EPS growth, political uncertainty both abroad and at home, and the general idea that “this can’t go on forever”. Every time there seemed to be a lack of another catalyst for growth, the market gains extended further - beyond any previously recorded bull-run.
As you can see, and as we have documented in our Quarterly Investment Reports, there have been temporary and constant bumps in the road. Since this most recent bull market began in 2009, each year has experienced intra-year lows greater than or equal to a 6% drawdown, with 8 of the last 10 years posting intra-years lows of double-digit drawdowns. The above graph highlights why Wellspring focuses on investing for the long-term and avoids reacting to short-term market movements.
So beyond the noteworthiness of the record, what does this long market expansion mean? Is the market going to keep going up indefinitely or does the streak end, and when?
Unfortunately, we do not have a crystal ball allowing us to tell the future. So we will remain disciplined and data-dependent and will not react to headline news, continuing rather to focus on the factors that matter in protecting your capital.
Bull markets do not simply die from old age – they end for specific economic reasons.
Earnings per share growth has increased organically over the past few years, driven by margin and revenue expansion. Employment data demonstrates near or at full-employment, with unemployment right around 4%, and the Federal Reserve has been steadily raising short-term rates over the past few years – all signs of strength in the economy.
However, as the economy continues to heat up, we are observing data that would lead us to believe that a slowdown may be in the future. The Federal Reserve is raising short-term rates, and as a result the normally positively-sloped yield curve is flattening – a prominent leading indicator of a coming recession. To revisit our baseball analogy from before, while the game is certainly not over, we believe the economic cycle is moving toward the final innings.
Coupled with rising interest rates, volatility has returned to the markets. The VIX, the most common measurement of volatility referred by many analysts as the “fear index”, spiked earlier this year for the first time since the 2015 global slowdown.
With more factors pointing to a potential correction, it may seem like your best course of action would be to exit the market right now. As the next chart illustrates, average investors tends to overreact, and as a result they make decisions that cause them to miss out on performance returns they might have otherwise enjoyed, had they remained invested and diversified. We rely on data to guide our investment process and avoid these overreactions.
So beyond the noteworthiness of the record, what does this long market expansion mean? Is the market going to keep going up indefinitely or does the streak end, and when? Unfortunately, we do not have a crystal ball allowing us to tell the future. So we will remain disciplined and will not react to headline news, continuing rather to focus on the factors that matter in protecting your capital. Bull markets do not simply die from old age – they end for specific economic reasons.
Recently we have taken steps to reduce risk in portfolios where economically beneficial, but we are by no means market timers. We will continue to evaluate the data and enhance returns by finding opportunities to lower fund manager fees, while reducing portfolio risk through diversification and appropriate asset allocation.
Three Thousand Four Hundred Fifty Three days – and counting. That is how you measure history.