It was a day on which very little else seemed to happen, but 20 years ago, Dec. 8, 1994, we had the start of the huge bull market run that lasted until 2001.
That didn’t even happen to be the low for the year, but it’s the generally accepted launch date.
The Wilshire 5000 Total Return Index gives an excellent approximation of dollar changes in the entire U.S. stock market. According to blogger Eddy Elfenbein, this index is up, from that 1994 date through Nov. 13, by more than 10 percent, annualized. And this, of course, includes the 2000-2001 and 2008-2009 market downturns.
And yet, simply because the stock market has been up for “so long,” many feel that it just has to drop. No, it doesn’t—any more than it has to continue going up. The truth is that, ever since we got this party started in March 2009, there’s been relentless skepticism about this market. Barry Ritholtz calls this “the most hated rally in Wall Street history.” He’s right, and in spite of the real record of over 40 new highs in the S&P500 this year and last, it still continues to be so.
Investors are inundated with daily tsunamis of data and charts from newspapers, magazines, three major financial news networks, and countless websites. All of these have endless space and 24 hours of airtime to fill each day. Unfortunately, the vast majority of speakers and writers seem to suggest that every pullback is the beginning of the end and that you must get out of stocks right now.
I sometimes feel as if I’ve stepped into a time machine that’s taken me back to those bad old market days in the late 1970s and early ’80s. The market had then languished from its 1974 low all the way through mid-1982. Even after what we’ve experienced in the stock market over the past five-plus years, it sure feels like the current sentiment is a whole lot similar to that held by investors back then. No one at that time—and very few now—seems to be willing to accept that the bear market was, and is, over. In spite of having witnessed this tremendous growth, investors have the same skepticism present yet today.
To quote the late Sir John Templeton, “Bull markets are born out of pessimism, grow on skepticism, mature on optimism, and end in euphoria.” Based on his sage observation, it looks to me as if we’re still well in the early goings. My view is that there are a number of forces now acting upon the market, which seems to me could continue to move us higher over the near to intermediate period.
The secular bull
Some context first. I firmly believe we’re in a secular bull market for stocks. Secular market cycles are typically long-lived; they can be as long as decades. For instance, we had a secular bull market in bonds from 1982 through 2013, and a secular bear market for stocks from 2001 until last year. These cycles alternate between long-term bull and bear markets.
Here’s why I think that we’re in a secular bull cycle.
I’m suggesting that, in spite of the recovery beginning in 2009, this bull market didn’t “officially” begin until 2013. That’s simply because that’s when the S&P 500 and Dow broke through their previous highs. The Nasdaq, while actually being the best performing index so far this year, still is about 20 percent below the all-time high it hit in March 2000.
Further, as has been demonstrated by the steady flow of positive U.S. economic news, our economy continues to grow, which, in turn, should reflect in more earnings growth. This is the growth that ultimately moves stock prices.
History is on our side
The folks at Standard and Poor’s have some interesting data around mid-term elections and the markets.
For example, since 1928, the maximum period for which data on that index are available, the S&P 500 has risen over these three months after the midterm elections at nearly double its average gain for three-month periods.
This example is different; it has to do with years ending in five. There have been eight years that ended in five since that start of the daily S&P 500 data. They’ve been up with an average gain of 25.3 percent; ranging from 3.0 percent to 41.4 percent. By the way, the two-year gain for years ending in five and six averaged 37.6 percent, with seven of the eight periods having double-digit gains and only one period down by 5.2 percent.
And one more example from the Stock Trader’s Almanac. Their data show that fourth quarters of midterm election years have produced an average gain of 8 percent in the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16 percent two-quarter rally the best combination of the election cycles.
There are no guarantees, to be sure, but those are pretty good precedents nonetheless.
We’ve had an outstanding five-year run, without much of a correction or pullback. No one knows when the next 15 percent to 20 percent correction will occur, but when, as and if it does, that doesn’t change the case for this secular bull. They’re just part of the deal.
In general, I see some relatively declining risk aversion, rising confidence, less uncertainty, and continued growth. The level of consumer confidence has risen during the past few years, but interestingly, it’s still about only equal to the long-term average.
The dollar is rising because the outlook for the U.S. economy continues to improve and because we’re doing much better than most other developed economies. That, in turn, helps to build confidence.
Gold is falling because inflation remains well under control, the dollar is strengthening, and the world hasn’t ended. Gold had been priced to all sorts of calamities (e.g., a collapsing dollar, geopolitical turmoil, and faux double-dip recessions) that have all failed to materialize.
The stock market continues to do well because earnings are doing well. I believe investors shouldn’t be on the sidelines.
The midterms are behind us, Fed tightening is behind us and our economy continues to grow. Things look pretty good as we ease into another year-end.
Michael Maehl is an independent financial adviser and Spokane-based senior vice president of Opus 111 Group LLC. He can be reached at 509.747.3323 or firstname.lastname@example.org.
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