There is a common misconception that stocks are in the ninth year of a bull market that began in early 2009. The misconception provides an opportunity to profit. The market is a very selfish place. We’re here to make money.
There are many reasons why we are not in the ninth year of a bull market in stocks. A lot of it has to do with identifying your time horizon. Are we referring to a much larger secular trend or a smaller more intermediate-term cycle? Either of these time horizons can apply and neither suggest we are anywhere close to a decade-long bull market for stocks; in the United States or otherwise.
The single reason being used, not one of the reasons but the single reason being used, is because in 2011 the S&P 500 only fell 19.38% from peak to trough on a closing basis, and not a full 20%. Again, this is the only data point used to suggest this is a nine-year bull market.
Let’s address the issues here one by one. To start, 20% is a completely arbitrary number. I’m not sure who made this up, but there is zero logic why a 19.999% correction is still considered a bull market, while a 20% correction is considered a bear market. As market participants, we must not accept faulty reasoning.
Next, let’s point out the fact that anyone claiming that this is a bull market in the S&P 500 is blatantly choosing to ignore reality. They are trying to convince you that this is a bull market simply because the S&P 500 Cash Index fell only 19.38% while the S&P 500 futures fell more than 22%, and on an intraday basis the S&P 500 Cash Index also fell more than 20%. They are cherry- picking this one specific vehicle to make their claims. They get to lie in a headline so you either click/watch/listen, or in other cases they skew their “research” to help achieve their own goals, such as to gain attention or help raise assets. It’s unfortunate, but their motivations clearly do not align with ours as market participants, and they make it very obvious.
Many Stocks Struggled
Bear markets are an extended period of stock index declines where over time the majority of stocks in that index participate to the downside. In other words, this is a market of stocks, not just a stock market. In 2011, almost 70% of stocks in the S&P 500 had corrected more than 20% from their peaks. Also, by the beginning of 2016, 63% of stocks in the S&P 500 had corrected by more than 20% from their top. So twice, a majority of components in the S&P 500 had corrected dramatically, arguably entering a bear market. To suggest that these periods were bull markets is not only incorrect, but an irresponsible statement to make by anyone who experienced trading in those markets. “Find the sleeping bear,” right, is a good chart showing these bear markets.
To continue with this theme of cherry picking indexes that fit your narrative while blatantly ignoring the important facts, look at the S&P 500 Equal Weight Index (EWI). EWI treats each component in the index exactly the same, giving us a much better gauge of market breadth (see “Equal weighting reveals,” right). Remember, when analysts choose to use the S&P 500 Market Cap-Weighted Index to determine bull and bear markets using their arbitrary 20% level as the threshold, trends can be distorted. Meanwhile, in 2011, the S&P 500 Equal Weighted Index fell more than 25% from peak to trough. Also, if you really want to be picky and use only closing prices, once again the S&P 500 Equal Weighted Index fell more than 23% from peak to trough on a closing basis in 2011. But the irresponsible parties will tell you this doesn’t count. They tend to use the S&P 500 Market Cap Weighted Index, and only use the cash market, not futures.
Next, let’s remember that the S&P 500 is not the stock market. By cherry picking this one index, and only the S&P 500 Cash Index, not S&P 500 futures, they are blatantly ignoring the rest of the world. While a majority of S&P 500 stocks were getting killed throughout most of 2015 (because we were in a bear market), the rest of the world was selling off by much more. By January of 2016, emerging markets were down 45% from their peak in 2011. Was that a bull market too? Europe and Japan each fell around 30% from their 2015 highs. Were those bull markets? The Russell 3000, which represents approximately 98% of all investable assets in the United States equities market fell 23% from the 2011 highs. Was that a bull market? The All Country World Index (ACWI) fell 27% in 2011, and then fell 22% in 2015. Bull markets also?
What Cycle Are We In?
The bottom line is that we’ve had plenty of bear markets since 2009. This is not the ninth year of a bull market. So when did it begin, you ask? There are a few different market cycles traders can point to. One is the breakout in 2013, when prices finally got above the 2000 and 2007 highs. A valid argument can be made that this was the start of a new secular bull market and the end of a 13-year bear market that began after the boom of the late 1990s (see “The real cycle?” page 44).
Another argument can be made that a bear market for stocks ended in the first quarter of 2016 and a new cyclical bull market began. This is when emerging markets bottomed out after five years of declines. The entire metals and energy complex also put in their bottoms during this time (not a coincidence). Japan, Europe and the United States (S&P 500) bottomed in February of last year, right around the same time. Credit spreads, which we look to for confirmation of ongoing trends in stocks put in their bottom at the same time. This was not one big giant coincidence. This was when market participants globally reached a point where demand finally was able to exceed the selling pressure that we had seen persist for a long time, which some might refer to as a bear market.
It makes it very difficult to argue that we’re pushing a decade-long bull market. It’s simply not the case. When we talk about timing, the start of the bull market of the 1980s and then through the 1990s — separated by the worst day for markets since the Great Depression in between — was 1982. That was the year that we finally broke out of the bear market from the 1960s and 1970s. No one says that the start of the new bull market was in 1974, when we hit the bottom. That’s because we had three bear markets shortly thereafter where the S&P 500 lost well over 20% each time. Then in 1982 we broke out of this base (See “Long-term trends,” below).
So why is this time, with the bottom in 2009, the start of a new bull market? You can’t have it both ways using the 1980s model. The start of this new bull market was in 2013 when we broke out. But let’s remember that emerging markets Europe and Japan continued to decline into 2016. So there is more to it than just this.
Playing devil’s advocate, you might say, “Well the S&P 500 represents America and American investors, so we use that index.” OK, let’s go with that for a second remembering that you are specifically cherry picking the S&P 500, ignoring every single other U.S. Index and International Index and also ignoring the fact that intraday the S&P 500 fell more than 21% in 2011 and that the futures market also fell more than 20%. But to suggest that the S&P 500 represents American investors is also wrong. This is money coming from all over the world, not just the United States. With each day that passes, the stock market is becoming more and more global. So if you want to know what the stock market is doing, it would be irresponsible to focus on just one cap-weighted index in just one country.
To help identify the direction of the underlying trend in stocks, it makes sense to take the top 10 exchanges from all over the world and create an equally-weighted index of 10 of the world’s largest exchanges, including both developed and emerging markets. We’re including not just U.S. stocks, but stocks from Germany, UK, Japan, Canada, Brazil, China and Hong Kong. You can see that twice during the past eight years we have seen corrections in global equities of more than 28% (see “Global trends,” right). These are not characteristics of bull markets when stocks lose nearly a third of their value twice over the period you are claiming is an eight-year bull market.
Why Is This Important?
So, when you see people trying to convince you that we are in the ninth year of a bull market, this is further evidence that their goals are not aligned with ours as market participants. The media loves the headline, and doesn’t care whether it’s correct or not. Then there is the sell side trying to make you feel bad for not keeping up with this bull market so you can move your assets to their firms. There are also examples of people commentating that are just wrong, and don’t actually have any malicious intent. But this is the rare exception, not the rule. More often than not, people are trying to fool you for their own personal gain, whether dollars or clicks (that lead to dollars). It’s best to assume all these so-called experts are completely full of it, until they prove otherwise.
The irresponsible don’t let facts get in the way of their narratives. Winners ignore that noise and instead focus on reality. Data mining and cherry picking to create an alternate reality is not for the winning trader.
This is not just an academic exercise; there is a competitive advantage in recognizing that we are not in the ninth year of a bull market of any kind. This misconception drives investors toward the belief that we are in the later stages of a secular advance and perhaps a healthy correction is due, when in reality, we could potentially be in just the second year of a bull market.
A very good argument has been made here that we are in the fourth year of a U.S. equity bull market and already passed our first cyclical decline. The fact that emerging markets and many other developed markets around the world didn’t actually bottom until last year suggests that we are much more likely to be in the early stages of a bull market than in the later stages.
We’ve seen secular bull markets last more than 15 years. There is no reason to believe that we can’t see that again. If we do, and if history is any indication, then we are much closer to the beginning than the end. Considering how few people recognize this is happening is likely a catalyst to extend a rally much longer than most think. So, while we will have cyclical corrections, just like every other period in time, the bigger picture is the trend is up and there is no sword of Damocles hanging over an old-in-the-tooth bull. This bull is young and vital.