5 Reasons This Bull Market May Only Be Half Done
Some investors believe that, despite the rebound strength stocks have shown since the early August pullback, the bull market is now so long in the tooth that it’s time to give it a retirement party.
Yet, in terms of historical longevity averages, the odds are that this bull is no more than half finished.
The history of U.S. stocks is one of long, highly profitable bull markets that deliver wealth and short bear periods that ultimately don’t tend to matter much for long-term investors who stay the course by holding on to their stocks.
For impatient investors, the market’s overall net growth from alternating bull-bear markets over the last few decades may seem unacceptably glacial.
Yet just as glacial progressions transform landscapes, halting market growth transforms portfolios—for the patient. Over the ultra-long term, cumulative gains from bulls have far exceeded losses from bears in the U.S. market, resulting in an average gain of about 10% annually.
Long Bulls, Short Bears
And when the market is growing, as it has this year and now is doing again post-pullback, the generalized (and contagious) fear that the bull may be waning should be tempered with a strong dose of historical perspective.
We’re now 1.7 years into the present bull market, and this is making some people quite nervous. Perhaps they could relax a bit from a dose of historical perspective.
According to data from First Trust, the average bull market since 1942 has lasted 4.3 years, with an average cumulative total return of 149%, as measured by the S&P 500.
The average bear market in this modern period has lasted 11.1 months, with an average cumulative loss of -31.7%.
And while there have been a few relatively short bulls—including a couple of about two years and one of 1.8 years (cut short by the pandemic crash in 2020)—it’s clear that when bulls start running, their legs get stronger and keep pounding the turf for much longer than bears tend to dominate the investing landscape.
If the bull is only half done at its current age of 19 months, an implied total lifespan of 38 months would still be 14 months short of the modern historical average of 52 months.
The bearish thinking that we almost always see this far into bull markets is actually curious. The longer the bull runs, the more likely these investors are to get twitchy with fear that their stocks will soon crater after the market has hit new highs.
Nature of the Beast
But that’s not how bulls tend to go. New highs are their very nature. In a market always (haltingly, but overall, always) growing over time, it’s only natural for new highs to be reached—and then reached again and again in most, if not all bull markets.
The current bull market has been no exception. Of course, investors upset about the decline of their account totals from the recent pullback aren’t experiencing new highs right now but, given the market’s upward course, they probably will be soon.
The relative durations of bull and bear markets is a difficult concept for many individual investors to get their heads around, especially amid declines, when they’re moping about the red ink on their brokerage account web pages.
These declines are usually precipitous relative to bull gains because the market tends to take the stairs up and the elevator down. Selling reflexively out of fear is always faster than making judicious investing decisions.
Of course, there’s no Delphic oracle for the market, but reasonable inferences can be drawn from current trends powered by structural strengths. These suggest that the current bull, though snorting lately to catch its breath, probably isn’t fatigued. These factors indicate that in all likelihood, this bull is probably closer to its beginning than its end.
Reasons For Sustained Bull Strength
Among the compelling reasons supporting this view these five:
- The coming interest rate cuts by the Fed. Economic slowing greatly enhances the likelihood that the Fed will start cutting rates in the fall, perhaps as early as September, likely boosting stocks. And post-first-rate-cut markets usually have been strong for about 18 months. Though slowing, the health of the overall economy supports the idea that this time around, post-cut market strength may be longer-lived.
- Strong forward earnings. As of the week of August 12th, the forward earnings of the S&P 500 index of large-company stocks rose to a record high, reflecting corporate strength likely to sustain stock growth. Subsequent forward earnings projections have been strong.
- The continuing global dominance of U.S. markets. The U.S. will retain its global edge because unlike other political systems, democracy and capitalism are magnets for capital. Technology is the driver of global growth, and six U.S.-based technology companies dominate the global tech scene. U.S. stocks make up almost 70% of the MSCI World Index. The dollar is and will remain the world’s premiere reserve currency, and the U.S. is now oil- independent, leads the planet in pharmaceuticals and has the best weapons and military. Capital flows to where it’s treated best, and that location is the U.S. market.
- Strong economic productivity. Currently high productivity is likely to continue. Renowned market economist Ed Yardeni calls productivity the economy’s secret sauce because it reduces the tendency for strong growth to fuel inflation. Yardeni and Wharton economist Jeremy Siegel, who called this bull market before just about anyone, see strong potential for recent advances in artificial intelligence (generative AI—the ability of software to learn on its own) to increase already-high productivity and thus foster economic growth without the accompanying pain of high inflation. And the market sees this implementation as ultimately being highly profitable for many tech and non-tech companies, as evidenced by the tremendous investment in companies heavily engaged in AI. This technology is the latest chapter in the now decades-long digital revolution which, led largely by U.S. companies reaping rewards for shareholders, is continuing to transform global industry, commerce and consumer trends.
- The strong potential for market growth to be sustained by broadening performance. Though the growth of tech companies went south a bit this summer, starting in mid-July with NASDAQ softening and then continuing from the early-August pullback, tech will probably do fine in the coming years, playing a strong role in extending the bull market. But non-tech stocks will likely do better than they have in the first half of 2024, strengthening the bull’s legs even more. This broadening of market growth is likely to benefit most, if not all, of the 10 non-tech stock sectors, likely meaning higher average returns for diversified investors.
For these reasons and others, it would be hasty to discount the potential for this bull to keep running. It may be less than halfway to the finish line.
This article was originally published on this site
