PMC Weekly Review - August 31, 2018
A Macro View: Longest Bull Market in History
Last week, the S&P 500 bull market became the longest on record, reaching 3,453 days old and outpacing the record bull run that occurred during the 1990s. Although it may seem we are light years away from both the 666 bottom the S&P 500 reached in March 2009 and the market forces that we experienced during the global financial crisis, we should remember we are not too far removed from this historic event. As we prepare to embrace the current record high and the market’s total return gain of more than 400%, let’s take a deeper look at its ride over the past nine-plus years and outline the potential for, as well as the risks of, extending the record.
The term ‘bull market’ is generally defined as a sustained period of a market rise of 20% from a low set at the end of a bear market, which in turn is typically defined as a 20% price decline from a previous high. Based on these definitions, the dates of bull and bear markets can be known only in retrospect. Looking back at the October 2007- March 2009 bear market, there was widespread selling, and the S&P 500 lost more than 50% of its value over the 17-month period.
Although the root causes of the global financial crisis have been debated widely by economists, the bursting of the housing bubble, structural weakness in the financial system, and an economic recession are usually seen as the lead factors. Two high-profile moments from the crisis were the rescue of Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008, both of which shocked market participants. Another development was the major role the Federal Reserve played: slashing interest rates to near zero, helping to facilitate major bank deals, and using other accommodative measures, including buying trillions of dollars in bonds, to help will the economy out of recession. Much of this accommodative monetary policy still remains in force today, despite several rate hikes over the past two years, and has helped propel and sustain the massive run that we have experienced.
Higher equity values and a prolonged bull market sound great, but is everyone celebrating? Many insiders often describe the current market as the most unloved stock rally in history. Despite strong gains, participants seem to be focused on all the risks and worries that potentially could derail the rally. There certainly has been a lack of euphoria that typically is experienced in bull market tops. Many investors also have kept the 2007-2009 period very close in their rear view. Another issue is that the market gains have been very concentrated, with the Information Technology and Consumer Discretionary sectors accounting for roughly 40% of the market’s gains. Apple has been the largest single contributor, making up roughly 4% of the gains. If investors do not own either these sectors or stocks like Apple, they are not fully participating in this rally, leaving some feeling left behind.
As we mark this milestone period for the longest bull market in history, it is important to remember the ashes markets rose from and also the larger factors that have been driving returns. Potential risks have been apparent in the market since it rose from the 2009 lows, but they have failed to fully overturn the bull. Despite several market pullbacks, the positives, such as strong corporate earnings, positive economic momentum, and monetary accommodation, have vastly outweighed over time the potential challenges of rising interest rates, fears of a global trade war, and other geopolitical events. There is no crystal ball to foretell when the equity rally will end, but for the time being, this record bull market rally remains intact.
VP, Senior Portfolio Manager
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