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Nine years a bull

3 April 2018

10:25 AM

3 April 2018

10:25 AM

On 6 March, global equity markets marked the nine-year anniversary of the global financial crisis’s end and the beginning of the bull market that followed[i]. Because markets haven’t yet recaptured levels hit before a pullback began in mid-January, it is premature to say the bull market is more than nine years old — we won’t definitively know that without the benefit of more hindsight. We believe that uncertainty makes this an opportune time to discuss what typically does (and doesn’t) end bull markets — and why we believe the bull that began in March 2009 should have more life left.

Since the MSCI World Index bottomed 6 March 2009, it has returned 274.7% per cent[ii] In our ongoing review of global financial media, we have seen some pundits argue that the recent dip is the first sign of a tired bull rally nearing its end. Reasons vary — good times have gone on too long, protectionism is creeping into the global economy, central banks are no longer supportive — the list goes on.

The MSCI World’s -8.9 per cent pullback from its 11 January high to its 8 February low isn’t technically a correction — a short, sharp, sentiment driven decline exceeding -10% per cent — but it appears correction-like[iii]. In our view, people searched for causes and landed on global inflation as a big story, without much evidence of an actual problem. Then, when newer data defied the fear, people largely ignored it. Perhaps that seems strange, but it is normal for sentiment to move on so quickly in a correction.

Given recent swings, we have seen pundits question how much longer the bull can last. The presumption: it is getting old and tired. But bull markets don’t die of old age. Excluding the current bull and using America’s S&P 500 (in USD) for its long dataset, the average length of a bull market is 57 months. However, that average obscures significant variation, from as little as just over two years (7/10/1966 – 29/11/1968) to nearly a decade (11/10/1990 – 24/3/2000). Similarly, the average magnitude is 164 per cent, but averages are made up of extremes[iv]. The smallest bull was the 48 per cent rise from October 1966 to November 1968[v]. The largest was the 417 per cent rise from October 1990 to March 2000[vi].

We believe bull markets end one of two ways: atop the wall of worry or with a wallop. Either sentiment becomes so universally euphoric that reality can’t possibly match expectations, or an unseen, huge negative development capable of knocking a few trillion pounds from global GDP materialises. In our opinion, one or the other will probably happen eventually, but neither seems near at this point.

In the longer term, markets move on the gap between reality and expectations. We believe successful investing involves judging both factors and gauging the surprise potential between them — either positive or negative. One might say this is more art than science, particularly when assessing sentiment — how much (or little) is priced into markets on a forward-looking basis. That said, based on our analysis, the current proverbial ‘wall of worry’ still appears to loom large and, in our view, argues against the bull dying on euphoria any time soon.

As for potential wallops, we don’t see anything right now with the size, scope or surprise power necessary. In our view, most issues are too small, too unlikely or too widely known. We have observed fears of a Chinese economic hard landing wear multiple guises in media coverage since 2011, and they continue today. China’s growth has slowed, but slower growth isn’t an implosion. Articles globally discuss a number of Brexit-related market risks, but all are well-known — we think constant discussion should sap near-term surprise power. UK inflation is also widely known and — even if higher prices were eventually to stymie consumer spending — the scope is probably too small to render recession globally. Related BoE and other central bank tightening fears are prevalent, but we believe rate rises are only a problem when they raise short-term rates above long-term rates, inverting the yield curve. In most developed nations, that isn’t close, based on the gaps between overnight and ten-year sovereign interest rates. Lastly, whilst the fear du jour — a global trade war — seems to be on everyone’s radar, President Trump’s targeted metal tariffs and other nations’ potential retaliation likely affect too small a share of the global economy and capital markets to cause a large ripple effect.

Rather than scouring for reasons why this bull should end, we think equity investors are better served asking why not be in equities. If an investor’s long-term objectives warrant equity exposure, we believe owning equities should be the default unless there is a strong likelihood of a bear market. Right now, we don’t believe that is the case.


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[i]Source: FactSet, as of 14/3/2018. MSCI World Index return with net dividends in GBP, 6/3/2009 – 6/3/2018.
[ii]Ibid. MSCI World Index return with net dividends in GBP, 6/3/2009 – 13/3/2018.
[iii]Ibid. MSCI World Index price return in GBP, 11/1/2018 – 8/2/2018.
[iv]Source: Global Financial Data, Inc., as of 1/3/2017. S&P 500 Index average price return for the periods 1/6/1932 – 6/3/1937, 28/4/1942 – 29/5/1946, 13/6/1949 – 2/8/1956, 22/10/1957 – 12/12/1961, 26/6/1962 – 9/2/1966, 7/10/1966 – 29/11/1968, 26/5/1970 – 11/1/1973, 3/10/1974 – 28/11/1980, 12/8/1982 – 25/8/1987, 4/12/1987 – 16/7/1990, 11/10/1990 – 24/3/2000 and 9/10/2002 – 9/10/2007. Presented in US dollars. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[v]Ibid. S&P 500 Index price return, presented in USD, 7/10/1966 – 29/11/1968. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
[vi]Ibid. S&P 500 Index price return, presented in USD, 11/10/1990 – 24/3/2000. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

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