Is the bull market on its last legs?

Rosie Bullard, Partner and Portfolio Manager, James Hambro & Partners

Rosie Bullard, Partner and Portfolio Manager at James Hambro & Partners

Investors are getting edgy. The equity bull market, which began on 9th March 2009 in the UK and the US, is now crawling into geriatric territory. It is heading for its century – about to hit 100 months old.

Many fear it must surely collapse soon. They have been predicting this since the start of the year. In that time the index of Britain’s top 100 companies, including reinvested dividends, has risen over 4%*. Since the result of the Brexit referendum was announced a year ago, it is up 24%. That is a lot of return to miss out on if you had listened to those who said the end of the world was nigh last June.

Lesson one: Living in fear of a bear market can damage your health – and wealth.

Those feeling nervous may find comfort in looking back at the historical data to understand some of the characteristics of bull and bear markets.

Be warned, there are a number of ways of defining them, which is why you will see different commentators giving different data. We define a bull market as one that continues on a sustained upward trend and only ends when there is a downward drop of 20% or more over at least two months. So a short sharp correction of say 10% does not signal a bear market and instead it could be an entry opportunity.

Lesson two: We should not automatically assume that this bull market is going to end soon.

Crunching S&P 500 numbers from the data library of the famous Yale University economist, Robert Shiller, Boston-based Newfound Research recently calculated that there were 12 bull markets between 1903 and 2016.

  • The average bull market lasted 8.1 years.
  • The longest bull market (May 1947 to December 1961) lasted 14.6 years.

Newfound says the current bull market, which followed the liquidity crisis and has just passed the 8.1 years mark, is the 7th longest and 6th strongest. It has been relatively slow to unfold – there was a similar experience after another deep crash, the Great Depression (the bull market that followed lasted 13.9 years).

Lesson three: While they last, bull markets can be extremely rewarding.

According to Newfound’s calculations, the average total return from a bull market is 387%. The 1947-1961 market returned 913%. All bull markets have generated double-digit average annual returns.

The current bull market has averaged 16% annual returns based on MSCI All Countries World Equity Index in US dollars. The S&P has returned over 325% (measured in USD). In sterling, the MSCI UK index is up nearly 200%.*

Lesson four: Bull markets last significantly longer than bear markets.

This explains the investment axiom that markets climb a wall of worry. It is hard to believe a market can carry on delivering such strong returns for so long.

Bear markets are typically much shorter – Newfound’s numbers suggest an average of 18 months. But those 18 months can be very painful. The worst was the Great Depression, which saw a fall of 83.4% from peak to trough. The Liquidity Crisis of October 2007 to March 2009 resulted in a 49% fall. This is why they sear so deeply on the memory.

Lesson five: It’s human nature to be nervous in bull markets

Behavioural economists tell us that “losses loom larger than gains” in our minds – the pain of loss is actually twice that of the pleasure of a gain. So we can fear bear markets more than we enjoy bull markets.

Even in a bull market you can expect to suffer losses in as many as one month in three. As the market matures, each down month can easily feel like the beginning of the end. The MSCI World Index in USD terms has been up in only 65 months of the last 100 months to end of June 2017, showing that markets do not go up in a straight line.

A correction – like the recent move in technology stocks – may be a buying opportunity or a signal to head for the exits. Any anxieties you have are understandable but they can lead you to be more cautious than you should be.

The secret to this one is to hand your money to a professional and not look very often. Too many DIY investors examine their portfolios every day, which tempts them into costly overtrading.

Lesson six: Market crashes come suddenly and from unexpected places.

Bear markets are often triggered by events that are very difficult to predict. For instance, the 1973-4 crash was caused by the collapse of the Bretton Woods system of international financial exchange and the OPEC countries introducing an embargo that quadrupled the price of oil. Few could have forecast these two events.

That is why you should have a diversified portfolio that contains some assets that mitigate against unexpected shocks. There is a performance cost to this insurance. The skill from an investment manager’s perspective is getting right the compromise between protecting you from the worst of any downside and capturing as much as possible of the upside.

What do we think of markets today?

Price earnings ratios, though a crude measure of market valuations, are at the high end in many countries. Yields have been compressed as a consequence of the market’s rally. However, monetary policy is still supportive of equities. Pro-fiscal government policies will also be supportive. The economic data coming through is better. Earnings beat market expectations in the last quarter, which is also supportive of equity valuations. We have seen positive earnings revisions, which should improve support for many stocks.

Quantitative easing has pushed bonds into bubble territory and squeezed yields to levels that are unsustainable. That is driving investors into equities and further supporting equity markets.

As we identified in our most recent market commentary, we see pockets of irrational exuberance. The example we gave was of Tesla, which is now valued higher than Ford. Tesla produced just 76,000 vehicles last year and has yet to make a profit. Ford has its issues but is profitable and made 6.6m cars last year.

This is not like the dotcom bubble where valuations of tech companies were wholly excessive. We are wary but we think this bull market has longer to run.

Rosie Bullard

*Data to 30th June 2017

Posted on July 4 2017

You should not act on this content without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.

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The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.

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