Bull Markets We Have To Bear

By April 3, 2019 October 10th, 2019 Investing & Market Commentaries

On March 9th, 2019, we celebrated 10 years of a bull market, making it the longest bull market on record. March 2009 told a different story. The market was down roughly 56% from it’s previous high, unemployment was 8%, and GDP numbers were showing a decrease of around 6%. Everyone hated that. Fast forward 10 years – back to 2019 – and everyone loves this bull market, right? Maybe not. Although the Dow is up 249% from the previous 2009 low, the bull market has not been consistent. Bull markets sometimes come with volatility and worries which we have to bear, even as we pocket the gains.

Such is the case with this bull market. When we hit the last bottom – back in 2009 – there was much talk of “black swans” (the term meaning something so extremely rare that it is totally unpredictable). Commentators looked back at the “greatest recession since the great depression” and concluded that the causes were so surprising that they proved the existence of black swan events, events which are super-secret, menacing, always lurking and ready to strike at any moment. When they strike, your wealth is wiped away, never to return. A widely accepted conclusion at that time was to avoid the stock market permanently because you’ll never know when a black swan will occur.

It’s important to realize that the key to the power of a black swan is that it will wipe away wealth forever. If it’s not forever, then what’s the point of fretting about them? If the gains, which are lost, are eventually recovered, then maybe black swans aren’t that bad. Maybe, they’re just normal. That is one of the most important lessons of our current bull market.

This bull market has been anything but consistent. Yes, as mentioned above, we’re up 249%, but let’s review some of the other milestones in this journey.

In May of 2010, computer-driven stock trading algorithms sense something and drive the market down 9%.

In August of 2011, Europe struggles with loans made to some of the weaker members of the EU and political brinksmanship in the US causes Treasuries to be downgraded. The market drops 19%.

In June of 2013, the Fed announces it will cut back on its bond-buying program, and the market throws a tizzy, rapidly dropping 5%.

In September of 2015, S&P companies experience 4 quarters of declines from the previous year levels, and the market drops 11%.

In December of 2015, the Fed raises short-term rates above zero. The market does not react to that, but soon thereafter it drops 10% without an obvious reason.

In June of 2016, Britain votes to leave the EU, and the market drops 5%.

In the 4th quarter of 2018, the market reacts to “worry” about the future and sheds 18%.

As you can see in the following chart (produced by Kiplinger’s Personal Finance), each of these drops was followed by a recovery. All these events and all these bounces up and down occurred within the context of the 10 years which has given us a 249% rise in the Dow. There are some important lessons to be learned.


First, the events which trigger these selloffs are always unique. No two are exactly alike, and they almost always come with some surprise. In this sense, we suppose there is some validity to using the term black swan.

Second, and by far the most important lesson, unpredictable events which trigger sell-offs are predictable. That may seem like a contradiction. We may not know what the triggering event will be, but the fact that there routinely are triggering events is actually pretty common. The last 10 years captured in the chart is illustrative of something which we could document throughout history.

These events are not super-secret, nor particularly menacing. Remember, if a black swan is to have any power it has to wipe away wealth permanently. None of the events chronicled in the last 10 years have wiped away wealth permanently. The fact that we’re up 249% despite these periodic bouts is proof of that.

But if you need more proof, try to recall all the negative things you can which have occurred over the last 40 years. Now compare that memory with the following market data:

  • Last 10 years – the market is up 249%
  • Last 20 years – the market is up 161%
  • Last 30 years – the market is up 1,000%

Stretching this to 40 years, the average annual return of the broad stock market was 12%. Factor in inflation and that is a “real” (after inflation) return of 8.8% per year. That’s real growth in real purchasing power, which is what allows you to live the life you want, and ultimately to retire to continue that life.
We could spend some time discussing the causes of the 2008-09 market drop, but the short version is a coupling of two relatively stupid policy decisions – community investment act regulations requiring banks to lend to those who could not afford the loans and “mark-to-market” accounting regulations requiring those banks to mark down assets to their perceived market value at any given time.

More instructive is to focus on why the market is up, the same reason it trends up over the long term. The short answer is the entrepreneur. Economies grow and markets rise when wealth is produced. Almost every S&P 500 company was at one time started by an entrepreneur. In the broader economy, there are thousands of companies below the level of the famous 500. The collective work of all of them bringing to their customer’s products and services which meet those customers’ needs is what fuels an economy. And the list of accomplishments is impressive.

Think about Apple. Through March of 2009, it had sold 17 million iPhones. That was impressive. But Apple went on to sell 1.3 billion of them, and it continues to innovate new products regularly.
Think about fracking. This was a new technology (developed by entrepreneurs) which allowed oil and gas to be extracted more cheaply from places which were deemed almost unreachable. The result is that the US is now the world’s biggest producer of oil – larger than Saudi Arabia – and thus no longer dependent on the political and pricing whims of OPEC.

Think about Uber. A company and a concept which allows previously unused surplus supply to be efficiently used at very low prices. Before Uber, lots of cars sat in lots of driveways or parking lots most of the time. Their owners drove them from one place to another, and they sat parked. Now, people can share their cars easily and earn some extra income by deploying what was a previously wasted asset to help others get around. It’s called “the sharing economy”, and the concept is being implemented in dozens of industries.

Think about the cloud. Cloud-based software is allowing people to share data and collaborate more quickly and seamlessly than ever before. Work gets done faster, better and less expensively.

We could go on, but you get the idea. Despite the momentary interruptions, the trajectory of a free economy is up, and stock markets at their most basic level serve the function of pricing that economic activity. The collection of all the investors in the market trying to determine what future profits will be – of the large S&P 500 companies and of the smaller ones – results in a stock price for each of those companies. As profits go up, the price of the company’s stock goes up. As profits go down, prices go down. Collectively there’s a lot of volatility in this, but over the long-term and across the broad spectrum of all companies in the economy, the trajectory is up.

What will the future bring? Most likely some black swans, but most certainly growth and wealth creation. We cannot know, nor should we worry about tomorrow, next week, next month, or even the next year. We can have confidence that the long future will look very much like the long history looks.

The key question is whether you want to be a part of it. We’re here to help you with that. How much should you be invested, and where you should be invested, depend on where you want to go and the life you want to live. Let’s put that down on paper, revisit the goals as necessary, and invest accordingly.

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