People have been asking me for the last year: “How long can this bull market last?” The answer is: a while longer. Usually, investors ask this question because they are trying to time the market. Bad idea. The real question they are asking is: “Should I get out of the market now?” That is unless they are already out of the market, in which case, they are waiting/hoping for a crash so they can get back in at lower prices. Unfortunately, many people have been sitting on the sidelines waiting for a crash for several years while the market has continued to defy them. Record levels of cash are currently sitting around uninvested. Some of that cash comes off the sidelines and props the market right back up every time we have a slight downturn. There have been four different 10% corrections during the current bull market, but they did not last very long, so the market snapped right back.
Aren’t we due for a recession?
By historical standards, yes. The stock market tends to follow an uptrend (bull market) for a few years before a 20% decline breaks the cycle. The longest bull market lasted just under 10 years, but the average duration is under five. The current bull turned 8 years old on March 9th of this year. In other words, this bull is no spring chicken.
The other factor that makes it seem like this can’t continue is the job market. The unemployment rate is at 4.4%, a 28-year low. Unemployment rates do not typically stay this low for long, before a recession usually comes.
The other factor is stocks are not cheap. They are trading above their historical valuations, and so is just about every major investible asset class (e.g., bonds, commercial real estate).
Why has the market been so resilient?
It is impossible to say with certainty why the market has been so resilient and exhibited incredibly low volatility this year. However, it may be a blessing in disguise that the economic recovery over the past 8 years has been one of the weakest in history. Real economic growth (GDP) cannot seem to break out of its unimpressive 2% range. Slow and steady is more boring than boom and bust, but I prefer it. The big unknown is what external factor will cause the bust.
Sam Stovall, a well-known investment strategist, pointed out recently that “Bull markets don’t die of old age, they die of fright. And what they are most afraid of is recession.” There aren’t many signs of a recession right now, so the good times may continue to roll for a while longer.
In 2000-2002, it was the dot com bust that caused the recession and tanked the market. In 2007-2009, it was the overheated housing market/subprime lending. Those were both big markets with big imbalances. For example, $7 trillion of household wealth disappeared from household balance sheets when the housing bubble burst. The warning signs or mini-recessions that we are starting to see in some industries (e.g., energy, auto sales, brick and mortar retail) do not have nearly that type of impact.
This could become the longest bull market in modern history. Eventually, however, this bull market will come to an end, and we will all miss it until the next one begins…likely just a year or two later.
Have a great week.