“Malinvestment is both cumulative and progressive. That is, the number of bad decisions rises as people become convinced that ‘this time it’s different’…”
If you’re getting the sense that stocks always go up, that’s because they’ve been doing so for a really, really long time. From CNBC today:
• The Dow has quadrupled during the bull market, which turned 9 on Friday.
• This is the biggest and longest bull market for the Dow post-WWII, according to Leuthold Group.
The bullish run in the Dow Jones industrial average — which celebrates its ninth birthday Friday — is the longest ever and the greatest percentage gain since World War II, according to Leuthold Group.
The corresponding run by the S&P 500, notes LPL Financial, is that benchmark’s second-largest and second-longest bull market ever, with only the 1990s stock market run led by technology stocks in the way.
Despite a more than 10 percent correction in equities last month following a burst of bullish activity, Leuthold’s Doug Ramsey doesn’t think the bull is done yet.
“Assuming the Dow Jones industrial average can exceed its late-January high on March 9th or thereafter, this cyclical bull market will become the first one ever to last nine years,” said Ramsey, his firm’s chief investment officer. “Historically, cycle momentum highs are usually followed by a push to even higher price highs over the next several months.”
The Dow hit an all-time high of 26,616.71 on Jan. 26, the same day the S&P 500 clinched its own record of 2,872.87. The major indexes are off their record highs 6.4 percent and 4.6 percent respectively.
This chart from Leuthold Group shows where the Dow bull market stacks up since 1900. It’s far and away the longest in modern financial times. In terms of percentage gains, it’s third behind two bull markets pre-WWII.
LPL chief investment strategist John Lynch, who measured the S&P 500, says the index is in the middle of its second-longest and second-greatest run ever.
The S&P 500 posted a 418 percent gain from October 1990 through March 2000, well ahead of its current 302 percent climb as of Jan. 26 as technology stocks boosted the index more so than the Dow.
To sum up, there have been a lot of bull markets over the past century, and they all ended eventually.
Why did they end? Usually because equity bull markets are part of broader expansions that eventually build up imbalances that force a retrenchment. The longer the good times go on, the more cocky investors and entrepreneurs become and the more dumb investments they make. These don’t generate sufficient cash flow to cover the interest on the related debt or otherwise satisfy backers, and eventually fail. Investors who lose money on failed projects stiff their creditors and so on, down the food chain until everyone is shell-shocked and risk-averse. Stock prices plunge, the economy contracts and the cycle begins again.
The key sentence here is “the longer the good times go on,” because the malinvestment is both cumulative and progressive. That is, the number of bad decisions rises as people become convinced that “this time it’s different” and they can’t lose.
Why the current expansion/bull market has so long is open to debate. What’s undeniable, though, is the vast amount of malinvestment that has accumulated. The biggest example might be corporations borrowing hundreds of billions of dollars to buy back their stock at record high prices. See Record Buybacks at Worst Possible Time. If those equities subsequently fall by half in a future bear market, today’s buybacks will end up as an object lesson in corporate hubris.
Another undeniable fact is that based purely on historical precedent, this bull market is ancient, which puts it near, if not at, its end.