As the bull market celebrates its 10th anniversary, and the surge of 2019 continuing on, many believe that things should come to an end soon, but this could go on for a while yet.
Bull markets don’t usually last as long as this current one has. 10 years is a pretty long time for one by any measure, and about twice as long as the average, depending on how you measure such things.
Given the jagged nature of stock prices, we could consider the period between 1982 and 2000 a continuous bull market, even though we did get a pullback in the second half of 1987 of about 30%. That’s not a small amount to give up in 6 months, but did serve as just a bump in the road when you look at the overall trend.
The downward move in late 2018 was similar, although not quite as large. The key to deciding whether this is a continuous move or not is to see how things respond when the downtrend ends, and like in 1988, we have responded well. Even the bears have to admit that this isn’t really over yet, even though they may think that it is nigh.
The length of a bull market really doesn’t have much to do with whether it will continue or not, even though we may think that the longer we go, the more likely a trend will end. It has everything to do with stocks continuing to be under accumulation, and as long as that’s the case, things will just keep going up.
It’s not that the macroeconomic environment doesn’t have much to do with all this, as it clearly does, but we really can’t just look at this data and look to make these calls. That’s what just about everyone does though, and it might seem like good news to hear that many of these people don’t see us being held back very much by this, because that serves to inspire confidence.
It is actually all about confidence, save for some actual economic problems that are significant enough to grind things to a halt, but even then, it is the confidence level, and the confidence level alone, that makes this all happen.
If we go back to the last bear market, the selloff following the housing market crash, we can ask ourselves whether these economic forces themselves brought the price of any stock down. We could say it did so indirectly, but only because it changed the mood of the market, and rather drastically at that.
It’s All About How the Flow of Money in and Out of the Stock Market
There are two components here, the amount of money that we have to invest in total, and where that money is going, and this is what really decides things. The economy does determine the first part, and when the economy is doing well, there will be more money that could be put into stocks, where the baseline of capital increases.
This normally increases every year as long as the economy is growing, which it normally does unless we are in a recession. Even in a recession though, its impact upon the total capital available isn’t that significant, and if we have a couple of percentage less to work with, that really doesn’t affect things very much unless the number is a lot higher and it lasted for quite a while.
Otherwise, this just keeps growing, and this in itself doesn’t produce bear markets. The economy actually tends to grow during bear markets, and stock prices go down in spite of this. Between 2000-2003, growth was slow, but we still grew by 5% over this time while stocks nosedived by almost 50%. We don’t want to see recessions interrupt this growth, but it’s actually more because this will upset the mood of the markets more than it will result in a little less capital being available to invest.
If stock prices and the economy were directly related, bear markets would be rare, and would only occur during recessions. Since most recessions are fairly minor and short-lived, these bear markets wouldn’t last very long and only involve small losses, a few percentage points in fact.
Even the Great Recession didn’t involve that much contraction, around 3% in fact, and a corresponding 3% drop in stocks wouldn’t have bothered very many people. This is not at all how this all works though.
Since the stock market is a market, and the prices that get traded in markets are a function of supply and demand, this is where this all gets decided. This should be more obvious than it is, if not for all the confusion out there that tries to explain this by way of external factors forcing the hand of investors.
Growth of Any Magnitude Is Still Growth
If we go from 4% growth to 3% to 2%, this is all growth and in itself does not cause a decline. If the economy isn’t declining, even if this is what drives stock prices, it doesn’t even make sense to claim that a positive level of growth causes a corresponding negative level in stock prices.
At best, what this may do is cause a corresponding slowdown in growth in stock markets, and this does tend to exert such an influence, although mostly because this changes our outlook. This certainly does not cause bear markets, but other factors do, the way supply and demand for stocks change.
There are two sides to this, how supply changes and how demand changes. In a bull market, people are less eager to sell and more eager to buy. In a bull market, we see the opposite.
Low growth levels, especially ones that drop below 2%, can scare investors off, but it’s the act of being scared that brings us down here, like what happened between 2000-2003, where each year put in a positive number but on the smallish side. The only way to see what will happen is to watch though, and we can’t just say that going to 1.5% or something is going to cause a bear market, although we could indeed take this as a cue if we want.
At present, people are more eager to buy than they are to sell, and the bull market therefore continues. We can certainly look to the things that influence these tendencies though, so it’s not that the data doesn’t matter, but we cannot try to impart more weight to them than they deserve or it would make sense to.
The bears point to the economic slowdown, and this may cause growth in the stock market to slow down as well, and it also could inspire a bear market, but if and only if market sentiment turns negative. The money out there that could be invested continues to grow, albeit at a slower rate, and a certain percentage of this will be in stocks with the rest being in something else, bonds or savings for instance, and it is this market share that really matters.
When we see a net outflow from stocks to bonds for instance, this increases the supply side pressures of stocks and drives the price down. As long as people are staying put in the stock market though, and people continue to be willing to invest in it at current levels or better, stock prices can go up indefinitely.
As we know though, there are times, and some fairly long periods of time at that, where investor sentiment turns negative and we do experience bear markets. Stock prices are really about sentiment, and not just general sentiment, but the sentiment of those who are actually doing the trading in the market.
We can have the majority of stockholders bullish and hanging on to their stocks, but if the people who are trading them have their expectations reduced, this is what really brings down prices. The views of the people who are both looking to sell their stock and those who are looking to buy it is where the battle is fought, and depending on which side is stronger, who holds the strongest sentiment, is the side that wins.
We’re seeing this all play out in the market, and thus far, the bulls continue to be ahead. The fact that this bull market has lasted 10 years already is actually a positive, not a negative, as there is no fundamental reason why this should reverse just due to the length of it, and having a bull market go on this long tends to inspire more confidence to the upside than one of a much shorter duration would.
We could indeed extend this for another 10 years if we wanted to, and whether we do will depend on how well we can maintain this longer-term bullish confidence. While we may expect that the next 10 years may not be quite as nice as the previous 10, due to this level of confidence at least lessening from people paying heed to the macroeconomics of the day, being on the slow, even keel that is projected for the next couple of years is in itself just fine and not really bearish. It could be though if it were perceived as such, and this is where the real concern lies.
Only time will tell when bull markets end though, and they all do eventually, so it does pay to keep our eyes on the battlefield and look to spot a genuine reversal of sentiment that is powerful enough to change the momentum that we’ve built up. This time may indeed come soon, or much later, but it isn’t really here yet.