Tuesday, April 1, 2014

Happy Fifth Anniversary by Guest Blogger Buck Klemkosky

It all began on March 9, 2009 – a time of skepticism, despair and pessimistic thinking. Some were even questioning the future of capitalism. It had been a turbulent decade in the stock market with the S&P 500 peaking at 1527 in March 2000 before falling 49 percent to 777 in October 2002. The market then rallied 101 percent to peak at 1565 in October 2007 before suffering a 57 percent decline to close at 677 on March 9, 2009. The U.S. was in its worst recession since the 1930s, the financial system had nearly collapsed and housing prices had also declined for the first time since the 1930s. In total U.S. households had lost more than $13 trillion of wealth from the stock market ($9 trillion) and housing ($4 trillion). Investors had plenty of reason to be pessimistic.

While difficult to do psychologically, investing during pessimistic times provides opportunity, and March 9, 2009 would have been one of the best stock buying opportunities in two decades. The S&P 500 has increased 177 percent from March 9, 2009 to March 7, 2014 and total returns, including dividends reinvested, have exceeded 200 percent. During the five-year period, $15 trillion of wealth was created in U.S. stocks. A good five years to be invested in the stock market for sure.

Unfortunately, many investors have not participated in the bull market. Using mutual fund flow data, individual investors were net sellers of equity mutual funds every year from 2008 to 2012, to the tune of $500 billion. Equity fund investors did turn optimistic in 2013 and purchased a net of $19 billion. The opportunity costs of keeping the money in cash would have been huge given the low Fed-induced interest rates. Net inflows into bond funds during this period were $1 trillion, much greater than the net outflows from equity funds. An indexed bond fund would have provided five-year annual returns of 4.42 percent, much less than equity returns of 24 percent, but better than cash.

The sectors of the market that did the best and outperformed the S&P 500 during this five-year bull market were the ones that did the worst during the bear market and recession, namely consumer discretionary, financials, industrials, technology and materials. The more stable sectors of the economy, health care, energy, consumer staples, telecom and utilities, underperformed the S&P 500, although all had positive five-year returns.

Five years on, the bull market celebration continues. How does this one compare with prior post-WWII bull markets? Bull and bear markets are arbitrarily defined as market moves of +20 or -20 percent respectively. By that definition, there have been seven bull markets in the post-WWII era and the present one is the sixth longest and still counting; two more months and it will move up to number four. The granddaddy of all bull markets was the one that lasted from October 1987 to March 2000, 4,494 days, compared with the present one of 1,824 days as of March 7, 2014. This bull market’s return of 202 percent would rank it second to the one in 1987-2000.

Corrections of 5 to 10 percent are normal for any bull market, and the present one is no exception. The S&P 500 experienced declines of 16 percent in 2010, 19.4 percent – almost a bear market – in 2011 and declines of 9.9 percent and 7.7 percent in 2012. Volatility wise, this has been a fairly normal bull market.

Is this bull market starting to look long in the tooth? It may be starting to show its age but certainly hasn’t reached an exhaustion stage yet. Most investors have been skeptical of this bull market, which is understandable given the two bear markets since March 2000. It has climbed a wall of worry and skepticism with little of the speculative euphoria seen in the 1990s and other bull markets. The market is fairly valued by most valuation metrics but these are not normal times with historically low interest rates, strong corporate balance sheets, a stronger financial system and less-indebted households. Still, expectations of a growing U.S. economy and higher corporate revenues and earnings will have to materialize in order for this bull market to continue past its fifth anniversary.

1 comment:

  1. I look for a major adjustment withing the next two years...maybe sooner. There's normally an adjustment every couple of years, and we're overdue. When the next one hits, I think it won't be in the 10% range but larger. The Fed has been propping up a, as Brian Wesbury terms it, "plow horse economy" for too long. Now, Ms. Yellen takes the head chair, and it appears she's as clueless as ol' Gentle Ben.