Don't look now fans, but the current secular bull market in stocks turns 8 years old today. Yep, that's right; 8 years ago, today, Jamie Dimon stepped to the microphone on the White House lawn and reminded everyone that his bank not only wasn't at risk of collapse, but was actually profitable - despite the nightmarish environment.
Bam. Just like that, the fears of the global banking system imploding were erased. Lest we forget, this fear was real in early 2009. As of March 9, 2009, the S&P 500 was already down something on the order of 25% for the year. And this was on top of the 38% decline that had taken place in calendar year 2008. As such, the fear that the sky was actually falling, was real.
Granted, the mark-to-market accounting rule that forced banks to write down all those nasty mortgage-related securities that no one wanted to buy/own to the current fire-sale prices was a primary part of the problem 8 years ago. And while Dimon's presser gets a lot of credit for turning things around on that day, the fact that the mark-to-market rule was also changed right about that time was the real game changer.
Once the world realized that money market funds weren't going to "break the buck," that the banking system wasn't going under, and that, if memory serves, something like 23 of the 30 DJIA stocks were selling for less than the cash on their balance sheets, the secular bear market that had been in place since March 2000 ended and a new secular bull market was born. A bull that continues today.
The Secular Trends
To keep things in perspective, we need to remember that within the context of secular trends, there are "cyclical" moves - something I call "mini" bulls and bears - and that multiple mini bull/bear cycles can occur within a secular move.
For example, the current secular bull market began on March 9, 2009 and as of March 1, 2017 had produced a gain of nearly 260%. But to be sure, the ride has been a bumpy one as a couple mini bull/bear cycles and any number of scary "crises" (usually having something to do with Greece) have occurred along the way. Below is a chart of the mini bulls and bears seen since 2011.
S&P 500 - Weekly
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Using history as our guide, the current mini bull is likely just getting started. Sure, things are bit overdone to the upside from a short-term perspective and there can be little argument that a pullback, a correction, or a "pause that refreshes" is likely in order sometime soon.
But, the key is to recognize that according to Ned Davis Research, the mean return of cyclical bulls that occur during a secular bull trend is 106.7%. And the average duration of the moves tends to be about 2 years.
The Current Cyclical Move
So, with the current mini bull having begun on February 11, 2016 (again, according to the researchers at NDR), one can argue that this bull, while a bit frothy at the present time, could easily run farther before the bears get a chance to run with the ball again.
Another bullish portent is the lack of downside volatility seen since the "Trump Bump" began. You see, along with the joyride to the upside triggered by the optimism surrounding the new administration's policies has come a lack of volatility. Well, downside volatility, anyway. In fact, this week marked the 100th consecutive trading session without a single decline of 1% or more for the Dow Jones Industrial average. And for the record, the last time this happened was more than 20 years ago, in 1994.
You remember the 90's, right? Stocks moved relentlessly higher and the mega rally was interrupted only by the occasional hiccup triggered by a war in the Gulf, a mild recession, and an emerging markets crisis sponsored by Russia defaulting on its debt. Other than that, it was onward and upward. Good times.
The folks at Piper Jaffray pointed out yesterday that the type of low downside volatility period we are experiencing now (a) doesn't happen very often and (b) tends to be a harbinger of more upside to come.
According to the report from Piper's research team, the DJIA has traded within a 1% range for more than 70 trading days only 21 times since 1950. Looking out a year after such a low volatility period occurred, the Dow was higher 85% of the time, sporting an average gain of 13.9% in the ensuing twelve months. Not bad.
The Bottom Line
So, while traders are entitled to fret about rates moving back to the high end of the current range, the potential for a bear market in bonds, and the next chapter in the oil debacle, I'm of the mind that the bulls should be given the benefit here.
To be clear though, I've also been whining a fair amount lately about the state of our big-picture models. And I'm on record as saying a time or two that this is NOT a low-risk environment due to the level of valuations, the rise in rates, the potential for policy disappointment, etc. As such, while the trend is your friend at this time, we should recognize that at some point in the next year, the bears could indeed take control of the game and scare investors silly for a while.
But this is when it is important to keep the secular trends in mind - and to have cash at the ready to "buy the dip" from a long-term perspective.
Thought For The Day:
Love never fails; Character never quits; And with patience & persistence; Dreams do come true. -Pete Maravich
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Trump Administration Policies
2. The State of the Fed's Next Move
3. The State of the U.S. Economy
4. The State of Global Central Bank Policies (Think ECB pulling back on QE)
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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