Does it really matter when a bull market begins? Whether you measure it from the low in 2009 or when new highs were made in 2013, isn’t this just semantics?
Bull markets are in the eye of the beholder, and when we mark the beginning is of little importance, unlike things like earnings and valuation and interest rates. Subjective and unimportant as it may be, I do think it can affect investor psychology, if only at the margin.
The other day a friend of mine texted me thats he keeps reading that we’re due for a pullback because of the length of this bull market. Unfortunately, we’re going to be seeing a lot more of this talk in the next few weeks.
Bank of America’s Chief Investment Officer Michael Hartnett writes to “Get the champagne out For US stocks”, because we are now just 14 trading days to go until the S&P 500 bull market becomes the longest of all-time, at 3,543 days, on August 22, 2018 (via Zerohedge). Well then in this case, how we talk about this current bull market will absolutely affect what certain investors do, even if it doesn’t directly affect the market as a whole.
I’ve long been of the opinion that a bull market begins not when a bear market ends, but rather once the previous bull market highs are broken. Let’s use The Great Depression as an example. Did the bull market start at the bottom in 1932 or when new highs were made in 1954? And what do we call the period from the bottom to the previous high?
From the low in ’42 until the Dow finally passed its ’29 high in the end of 1954, the Dow gained 285%. It’s hard to call this anything other than a massive bull market, even if it took place within the confines of a high made years earlier. Do these labels matter? No, I guess not, but sometimes it’s okay to argue about trivial details.
These things are not black and white, and I had something of an internal struggle when Adam Scott asked me a simple question, “From where should we measure a bear market?” I think everybody would agree that a bear market is measured from the peak, the implications being that a bull market should in fact be measured from the bear market low.
Which brings us to today.
I’ve long thought that the bull market started in March 2013, and not in March 2009, but that simple question, while it didn’t change my opinion, certainly gave me a better appreciation of “the bull market began in 2009” mind-set. Whichever camp you fall in, the salient point is that I believe we experienced two resets along the way, invalidating the notion that this is about to become the longest bull market in history.
From April through October 2011, the S&P 500 fell 21.6% intra-day. However, on a closing basis, it fell just 19.4%, so an official bear market didn’t make the record books. I understand a line has to be drawn somewhere, even if it is arbitrary, but in my mind that was a bear market.
I also think we saw a bear market from May 2015 through on February 2016. The S&P 500 only fell 14.2% on a closing basis, but the median S&P 500 stock fell 25%, and other areas of the market got destroyed. The Russell 2000 fell 26%, Emerging Markets fell 36%, transportation stocks fell 26%, and Apple Netflix and Amazon each lost 30%.
Prices fell in conjunction with declining earnings. The S&P 500 saw earnings fall y/o/y for seven consecutive quarters, as you can see below in this chart from Ed Yardeni. Again, this might not have made it to the record books, but this was a bear market for these businesses and their share holders.
In two weeks we’ll see headlines that we’re in the longest bull market of all-time. Whether you think the bull market starts at the lows or at new highs, remind yourself that we had two resets, because the articles certainly won’t.
All that being said, this is just semantics, and I think you’d be hard-pressed to fine anybody who thinks we’re still in the early stages of a bull market. A few points:
- The price-to-sales ratio of the median S&P 500 company is at an all-time high.
- The CAPE ratio is as high as it’s ever been with the exception of 1929 and 2000.
- At $1 trillion, Apple is bigger than the following S&P industry sectors: materials, real estate, telecom, utilities.
- The Netflix of fitness has a $4 billion valuation.
I could go on and on, but one of the lessons we should have learned from the last few years is this: we can quantify everything, but figuring out when these things will turn, which requires the ability to measure investor psychology, remains an exercise in futility. I could have said all of these things and more in 2013.
I’ve used this in previous blog posts, but it’s so good that it’s worth repeating. The best description of the late stages of a bull market comes from the great “Adam Smith’s” Supermoney:
We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment, the Black Horseman will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking “What time is it? What time is it?” But none of the clocks have any hands.
Since the beginning of time and for the rest of it, investors will be looking for clues that a turn is coming. We want to know what time it is, but we’re all staring at a clock with no hands.