A Bull Market Check-Up
If the Bull Market ended today, it would be the shortest Bull in post-war history.
The current bull market just completed its 18th month and it’s time for a check-up. So far, how does the contemporary stock market run compare to the other 12 bull markets since WWII? Does its rise appear outsized and extended, diminutive and underappreciated, or is it simply remarkably average? Is the bull still spry or is it starting to show its age? Finally, does it exhibit any unusual aspects compared to past bulls?
383 Days In …
Chart 1 shows the value of $1 invested at the previous bear market low for every bull market since WWII. The bold red line represents the current bull market. By comparison to the previous 12 bull markets, the contemporary bull has been subpar. The present-day bull is now 383 trading days old and its return since inception of 41.5% ranks 10th out of 13. The strongest bull market at this point with a 94.5% gain was the 2020 post-pandemic run and the weakest performance was just shy of 12% in the 1946 bull market. Overall, after 383 trading days, the average gain among the previous 12 bull markets was 48.7% with a median gain of 46.6%.
While this bull has spent most of its run among the weakest of post-war history, its spurt since last Fall now puts it close to breaking into the upper half. Overall, though, its range has remained fairly traditional – no big spurts or collapses along the way – and its cumulative performance thus far is nearing “average” bull market status. Moreover, its character does not raise concerns by appearing excessively exuberant (which the pandemic bull did at about this point, the green line in chart 1). Nor does the current bull appear broken or can barely be considered a bull (like the 1946 bull market represented by the bottom blue line).
Hitherto, the contemporary bull market appears traditional – continuing to trace the character of an “average” bull market trending higher. Perhaps most comforting of all, if the current bull ended today, it would represent the shortest in post-war history. While a new record could always be established, in historically comparative “Bull Years”, the present-day stock market run is still relatively young.
Sector Comparisons
Not surprisingly, one of the biggest outliers of today’s bull market is the concentrated nature of its advance. Chart 2 compares the total return of the large-cap, equal-weighted (EW) index relative to the market-cap weighted index during the first 18 months of all bull markets since WWII. So far in this bull market, the EW index has underperformed by about 8.5%. At this point in past bull markets, there were only 3 other times when the equal-weighted index had underperformed, and on average, the EW index had outpaced by almost 5%. Moreover, historically, during the next 24 months (months 19 to 42), the EW index has on average underperformed.
The biggest outlier and disappointment in the current bull market has been small cap stocks. As shown in chart 3, after 18 months into a new bull market, only two previous times have small cap stocks underperformed and none by as much as in the contemporary bull market. In this cycle, smalls have lagged by a miserable -12.9% compared to an average excess return in the other 12 bull markets of +14.4%! More discouraging, historically during the next 24 months (months 19 to 42), small cap stocks on average have underperformed even further. Obviously, it depends on how long this bull market may last, but the performance of Smalls typically fades as the bull ages.
With the Mag-7 driving the contemporary bull market, as illustrated in chart 4, the technology sector has achieved its second-best relative performance (20.9% total relative return) in the first 18 months of any bull market since WWII. At this point during the previous 12 bull markets, the tech sector had outpaced on average by +4.2%, and in four past bulls, by month 18, the tech sector was a cumulative underperformer. Considering how much attention new-era investments have received in the current bull market, although tech has outpaced in this cycle, it has not been a record-setting run. Indeed, since month 7, tech stocks have only been market performers. Encouragingly however, in past bull markets, the tech sector has typically outpaced during the next 24 months (i.e., month 19 to 42).
Finally, chart 5 shows that cyclical vs. defensive relative performance has been very traditional in this bull market. Thus far, cyclical sectors have outpaced defensive sectors by 16.3% compared to an average outperformance in the previous 12 bull runs of 13.6%. Its relative performance at month 18 is right in the middle, tied for 6th place. Defensive stocks have historically done much better relative to cyclicals during the next 24 months. By month 42, the average bull market outperformance by cyclicals over defensives declines to only 4.5%.
Biggest Contemporary Bull Market Outlier?
Interest rates are probably the most important outlier in the contemporary bull market. They remain higher than typical at this point compared to past bull markets. This probably explains why tech stocks have done better while smalls, equal-weighted indexes, and cyclicals have so far mostly underperformed compared to historic bull market norms. Charts 6 and 7 examine the state of interest rates compared to bulls of the past.
Until month 13 in the current bull market, the Fed funds rate (chart 6) was boosted more than in any bull market since at least 1957. Overall, the Fed has lifted the Funds rate by 2.25% so far in this bull market. As shown in chart 6, this interest rate has usually been lowered or at least kept mostly unchanged through the first several months of a new bull market. By month seven in the current bull market, the Powell Fed lifted the Funds rate by +2%. Historically, the seven-month average change in the Funds rate during past bull markets is a “decline” of -1.4%. Even now, at month 18, the Fed has lifted the Funds rate by 2.25% compared to a historic average during past bull markets of a decline of -0.7%. Moreover, at this point, the Funds rate was still lower in six of the past bull markets, and in 8 of the 9 past bulls, the most the Funds rate was lifted was 70 basis points or less.
What is also eye-catching is that by month 42 (24 months from now), the Funds rate on average was still lower compared to its level at the start of the bull market in 5 of the previous 10 bulls. Overall, by month 42, the Funds rate was only 57 basis points higher than it was at the start of the bull market. Today, the Fed funds rate is an historical outlier continuing to have significant impact on the overall character of this bull market.
Due primarily to ongoing Fed stubbornness, the 10-year Treasury yield (chart 7) also remains elevated at this point compared to past experiences. By month 18, the 10-year bond yield was still below where the bull market began in 5 of the previous 12 bull market cycles since WWII, was up by less than 25 basis points in another 4 past cycles, and on average overall, was down by 8 basis points. That is, most bull markets were supported by lower bond yields, while the current bull has endured a 10-year yield which has risen by more than 52 basis points. Encouragingly, in the past, by month 42 (24 months from now), the 10-year yield on average is only 16 basis points higher than it was at the start of the bull market.
The Fed’s decision to keep fighting inflation (even though the inflation rate peaked 22 months ago and has been trending mostly lower since) has made interest rates complete historic outliers in this bull market. The unique interest rate policy of the contemporary bull market has probably boosted the relative performance of the technology sector and depressed the outcomes for equal-weighted, small caps, and cyclicals. However, aggressive Fed policy also leaves open the possibility of unconventional late bull market interest rate cuts. Going forward, these could significantly alter the future character of the overall stock market and its internal sector performances compared to historic norms.
Back to the Future of Bull Markets?
How have past bull markets performed beyond the 18th month? Chart 8 offers an age guide for post-war bull markets displaying the total number of trading days for each cycle.
The current bull market is the shortest bull of the post-war era – but only by 36 days. However, although the current bull market is nearing the same age as the 1946 bull market and only a few months younger than the 2020 bull, it is still more than one-half year younger than the 1966 bull and more than a year younger than the 1970 bull. Beyond these cases, the present-day bull remains much younger (by multiple years) compared to any other post-war bull market. Overall, the previous 12 post-war bull markets lasted an average of 5.2 years and a median of 4.6 years compared to today’s bull currently at only 1.5 years old.
Chart 9 overlays the value of $1 invested in each bull market since WWII (shown on a natural log scale to help with comparisons). The red line represents the current bull market. Obviously, this bull still has considerable potential depending on how old it gets. For illustration, eight previous bull markets lasted at least another two years beyond trading day 383 and combined produced an average annualized total return of 12.1%. In the next two years after that, four bulls still existed and achieved an 11.9% average annualized total return. Even after four years into the future, there were still four bulls going and two bulls which last nearly another four years! There is no guarantee how long the contemporary bull market will last, but by historical standards the contemporary bull is still young.
Is Today’s Stock Market Overextended?
As the S&P 500 Index rose to new record highs earlier this year, terms like overextended, a mania, irrational exuberance, and a bubble were widely used to describe the current bull market. Undoubtably, the rise in the S&P since last Fall was fast and aggressive. Consequently, like in all bull markets, a pause or correction is looming at some point. Perhaps one has begun in recent weeks?
Nonetheless, as chart 10 illustrates, the current character of the S&P 500 simply does not epitomize an irrationally-bubbly-manic stock market. Yes, the S&P has enjoyed an aggressive run in the last year but most of this was “catch-up” from the bear market it experienced the year before. Currently, the S&P 500 is only 5.6% above its previous all-time record high 28 months ago at the end of 2021. That is, a paltry 1.9% annualized return in the last 28 months. Nobody has gotten filthy rich during this “bubbly” run?
Moreover, as shown on the chart 10, in just a little over the past 5.5 years, the stock market has effectively endured three bear markets — nearly a 20% decline in late-2018, a 34% collapse in the pandemic crisis of 2020, and a 26% dive in 2022. Most recently, the S&P 500 just last Fall also suffered a 10% correction. To put this in perspective, since WWII, the S&P 500 has experienced thirteen official bear markets, or on average, a bear market every six years. Suffering through nearly three bears in a little over five years when the stock market had only suffered 11 bears during the last 78 years? An abnormally high frequency of “bear market collapses” is hardly the typical character leading up to market manias. Nor is chronically depressed consumer sentiment, a near record-setting money fund to disposable personal income ratio, regular warnings from Fed speakers that inflation is still a risk and rate cuts will again be postponed, and persistent calls for an imminent recession by a cadre of leading CEOs.
The broader marketplace is even further from the type of ebullience which often characterize overextended stock markets. The small cap Russell 2000 index is still nearly 18.5% below its record high set in November 2021. The Russell 1000 Value Index is only 1.6% higher than its early 2022 previous record high. The MSCI International ACWI Index is currently at the same level as its 2021 record high. Finally, the MSCI Emerging Market Index is off by almost 30% from its record high in February 2021.
While a stock market correction after a solid run since last Fall is certainly likely at some point, a major collapse at this point seems unnecessary and improbable. Participation in this bull has yet to broaden significantly, investors have suffered an abnormally large number of bear markets in recent years, and pessimism and fear among investors and economic players remain too broad-based to chronically roil the Bear.
Don’t be surprised by periodic corrections along the way but stay positioned in a manner reflecting a “young bull”, which compared to historic norms, appears poised in the next few years to continue delivering satisfying returns for investors.
Thanks for Taking a Peek! Jimp
Disclosures__________________________________________________________________
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Thanks Vincent. Much appreciated!
Thanks so much Tim for the kind words.....much appreciated!!!