Why The Bull Market Isn't Done Yet

This month, the bull market officially celebrated its five-year "anniversary."

For some reason people think that's a big deal. It's almost as if the rally's birthday has led analysts to believe it's finally old enough to get in trouble.

How ridiculous.

There have been 25 major bull markets throughout U.S. history. Each of those runs has lasted about 900 days (2.5 years) on average -- with the longest spanning almost 14 years (1987 to 2000). The SP 500 gained an average of 103% during each of those periods.

The current bull market period ranks fifth on that list in terms of length, coming in just short of the index's 5-year rally from 1982 to 1987 -- which ran longer than the current rally by a matter of days.

But if someone tells you that means something about the market's future price action, they're just blowing smoke. Yes, this rally has lasted a long time. But that's because it's had to.

Remember, the 2008 financial crisis was the biggest market catastrophe since the Great Depression. It was so bad that people thought asset prices may fall to zero (No joke). While things never reached that point, once it was all said and done, stocks still lost about 50% of their value from the market's peak in 2007 to its low in 2009.

That means when the rally started back in March 2009, most stocks had to double just to get back to their 2007 levels. So yes, our current rally has been extreme. But that's what it took for things to return to normal.

And things are, in fact, returning to normal...

Whether you've realized it or not, the economy is healing. Not only is U.S. GDP expected to grow 3.1% in 2014 (the historical average is 3.2%), unemployment has quietly fallen to 6.7% -- within a few percentage points of the Federal Reserve's target rate of 6.5%.

And speaking of the Fed, I can't believe I'm saying this... but they've actually done a decent job managing the "taper tantrum." Since former chairman Ben Bernanke started tapering his record bond buying program late last year, they've stuck to his plan -- bringing total monthly asset purchases down from $85 billion in early December to $55 billion today.

And guess what, the market hasn't crashed. The SP 500 is actually up 2.2% since the taper started. I hesitate to say it... but maybe... just maybe... stocks are actually getting strong enough to stand on their own.

Don't get me wrong. I'm not saying navigating this environment going forward will be as easy as it has been over the last five years. With most major market sectors now trading back above their 2007 highs, it's getting harder and harder to find solid, undervalued growth stories in today's market.

Here's a chart showing you what I mean...

The table above shows the average annual return for each sector since the financial crisis began.

The first thing you'll notice is that financial service stocks and utilities are the only sectors posting negative annual returns since 2007 (meaning they're the only industry groups yet to fully recover from the 2008 financial crisis).

That makes sense. Utilities are generally seen as defensive investments. They tend to underperform when the market is in rally mode.

Financial services, on the other hand, was the most oversold sector during the 2008 financial crisis -- with the industry as a whole falling about 77% during that time. It's only natural this group would take a little longer to recover.

The second item you should see in the chart -- and arguably the more important factor of the two -- is that even the best performing industry, consumer discretionary, has only averaged 9.5% annual returns since 2007.

Remember, the long-term average for U.S. equity growth is around 7%. Given that right now the best performing industry is only beating that number by a few percentage points, from a long-term perspective this bull market doesn't look nearly as impressive.

Of course, we're not implying that stocks are going to continue their stellar rally. We're only saying that up until this point, the bull market we've been experiencing has been about the recovery more than it has been about speculative risk taking.

Unfortunately, with things finally getting back to normal, investors can't just throw darts at a newspaper and expect to make money anymore. While we remain bullish on stocks in general, we recognize that the recent price action means people are going to have to get back into the habit of selectively picking the best companies operating in the most promising industries.

Bottom line, it's clear that investors are going to have to be a lot pickier when it comes to making investment decisions going forward. Ignore the chatter about the bull market getting long in the tooth, so to speak. There's always a bull market somewhere.

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6 thoughts on “Why The Bull Market Isn't Done Yet

  1. We are in the 8th inning of a Bear Market Rally. It is absolutely not a Bull Market Rally! Adjusted to inflation, the stock market is still below the highs set 14 years ago. Doesn't anybody see that a financial like Citigroup would be back above $500 by now! You call that a recovery? What a joke! There is one more "Umph" left in this rally before things fall apart or blow-up! The stock market of 2009-2014 will forever be remembered as the phoniest rally of all-time! Expect the stock market to peak between August and October of this year. All you have to do is look at the chart. It's very clear that the Nasdaq is purposely being driven to 5,000 just for the sake of matching its top back in the year 2000. Look for a huge correction in Q4 to begin the downward spiral that will ultimately lead to a new generational bottom by the end of Obama's second term. By the year 2017, look for the stock market to probably go all the way back to 1995ish levels: DOW 5,000, Nasdaq 1,000 and S&P literally 500! Make a note of this: No two-term President in this country's history has ever led the stock market to 8 consecutive years of gains! Not even Bill Clinton in the Bull Market of the 1990s to 2000. If this president hasn't been able to stimulate the economy for the past 5 years, then why would anybody believe he will in his final 3 years? We have yet to experience what a full-blown, apocalyptic crisis is like. What happened in 2008-2009 was just a scare, a sampling, and a delay in the inevitable. I find it embarrassing to see Janet Yellen as head of the FOMC after watching her first Press Conference last week. She doesn't have a clue. She's only there to follow a script and pretend that the economy is improving. Funny how she scrapped the idea of raising rates when the unemployment rate hits 6.5%. How about scrapping the unemployment rate and telling us what real unemployment/underemployment is like? If things were going so well, then Bernanke would still be there! He made the right decision to leave on top, while things are still ok. Not normal. The economy can't survive on 3%+ interest rates on the 10-year. When mortgage rates go above 5%, who is going to want to buy real estate? Raise your hands! When the national average of gasoline goes to $5 a gallon, who is going to want to drive? Raise your hands! When the government can no longer support all of these entitlement programs and starts scaling back on subsidies for all kinds of stuff, the system will collapse! The rug will be pulled-out from underneath. The consumer will be kaput. Folks...when reality finally hits home...we are in deep, deep trouble!

  2. The article spoke of returning to the peak market levels of 2007 as returning to "normal". It's good to remember that peak levels in 2007 represented a huge real estate bubble built on fantasy economics and that real estate bubble pulled up most other sectors artificially. I'm not claiming that we're now back in a bubble - just that today's market levels have to be judged against today's economic realities. If PE levels are in the normal range, then that's comforting. Comparing today's market levels to 2007 levels, is, hopefully, comparing apples to oranges - we should gain no confidence just because we hit these levels before because in 2007 those were fantasy levels. More relevant are things like "What's going to happen in China near term?"

  3. I'm looking hard, but I can't actually see who actually wrote this. Maybe subscriptions are low.

  4. Aw, c’mon. An economy with annual GDPs of !% to 3% CAN NOT possibly create and support such a “bull market”. This “bull market” is a phony, FED-fabricated paper-price bubble. It has been created through borrowed money (QE) and printed paper pumping through fictitiously low interest rates that created a carry trade that can borrow at rates below inflation and gamble in The Great Wall Street Casino.

  5. This is music to my ears with this 'synthetic' economy--higher prices before the fall.

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