The bull market started March 9, 2009, 10 years ago Saturday. The S&P 500 had dropped to a close of 676 in the midst of the financial crisis, 2,072 points or 75% lower than its current 2,748 level. Given that the Federal Reserve has quintupled the size of its balance sheet in the intervening years, and that the heavy regulatory hand of the Obama administration gave way to a more salubrious attitude toward commerce under President Trump, perhaps the duration and the magnitude of the current bull market shouldn’t surprise us.
What is surprising, for those of us who lived through the decades before the financial crisis, is how joyless the market’s current ascent has been. Long gone are the marching bands and giddiness that accompanied successive highs during the dot-com era. Instead, what remains is a cynicism, likely the result of two 50% declines in the broader market from 2000-02 and 2008-09. Institutional and individual investors believe the bull market has been little more than an elaborate magic trick that will be revealed, in the end, to be ephemeral.
The good news for the contrarian investor is that this level of skepticism might mean that the bull market will last longer than anyone thinks possible. As legendary investor John Templeton said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
Aside from a few brief flirtations with cryptocurrencies and cannabis stocks, it would be very difficult to describe today’s investing public as especially open to risk-taking. Remarkably, fund-flow data suggest that individual investors have actually been net sellers of the market over the last decade. Since 2009, the roughly $1 trillion in inflows to domestic equity exchange-traded funds has been more than offset by the $1.3 trillion in outflows from higher-cost domestic equity mutual funds.
A few years ago we at Strategas started calling the current bull move the “Jake from State Farm” market. It was an oblique reference to an amusing commercial that depicts a wife confronting a husband who’s on the phone at 3 a.m. She thinks he’s talking to a paramour when in fact he’s speaking with Jake, a State Farm insurance agent. Even after she speaks with Jake, the suspicious wife can’t accept that he’s simply an insurance salesman in khaki pants: “She sounds hideous!” To which her husband replies, “Well, she’s a guy, so . . .” Investors are expressing similar levels of skepticism today with regard to the current bull market and economic expansion. Despite enormous evidence to the contrary, no one quite believes that it’s real or that it can last.
There is no shortage of things to worry about. But the biggest threats to the American economy are starting to fade, little by little. The current policy mix appears broadly supportive of further economic prosperity and market gains. The most important development has been the Fed’s reassurances this year that monetary policy won’t be left on “autopilot” as the central bank exits quantitative easing and excessively low interest rates. With the real federal-funds rate at a mere 0.5%, it is difficult to describe monetary policy as especially tight. (Of the eight recessions since 1960, none has started with a real fed-funds rate of less than roughly 2%.)
Regulatory policy, especially toward finance and energy, has eased dramatically during the Trump administration. The 2017 Tax Cuts and Jobs Act created real incentives for companies to curtail financial engineering in favor of capital expenditures, the mother’s milk of productivity and wealth creation. Perhaps the biggest potential policy hurdle has been the uncertainty surrounding trade. But here, too, it seems the worst has been avoided.
The Trump administration seemed willing to fight simultaneous trade wars with every nation on Earth last summer. But it has since negotiated deals with Mexico, Canada and South Korea. An agreement with China seems imminent, though what it will contain is anyone’s guess. It seems clear that at the very least, both sides want a deal that calms the fears of businessmen on both sides of the Pacific.
With the S&P 500 off to its best start since 1991, it is reasonable to expect a pause in the upward trajectory of stocks. But with the market trading at 16.5 times 2019 earnings expectations and 10-year Treasury notes yielding 2.6%, the actual risk-reward profile of the market is favorable.
The biggest risk to the long-term health of the economy and the market today is the desire of policy makers from both parties to allocate capital. This process is always best left to the collective wisdom of markets. Mercifully, such excessive meddling seems unlikely until at least 2020, or perhaps 2024.