It has been little more than one month since the two hundred twenty-ninth birthday of the New York Stock Exchange. Perhaps few outside the stern walls of this foundational Wall Street institution have much to say about that, but it is safe to assume that even these battle-scarred grounds have never witnessed anything quite like the whirlwind of mayhem and euphoria over the past eighteen months.
After a solid start to the fateful year of 2020, with all major indices hitting new highs in late January, the mostly overlooked announcement of a newly discovered virus on the closing day of 2019, began to persistently re-enter the thoughts of investors everywhere. You could sense it in the air, and sure enough, volatility began steadily creeping up, even as the S&P 500 peaked at an all-time high of 3,380 on February 10. Just over one month later, on Monday, March 16, the S&P 500 hit its nadir, closing at a stupefying 2,304. It is dearly wished by every rational investor on earth that the bleak and bloody month of March 2020 will remain forevermore the darkest in the NYSE’s hallowed history. For the record, there was an even worse single trading day in market lore, and that would be the junk bond-fueled devastation of Black Monday (October 19, 1987), when global markets plunged a full 23% in one day of frenzied selling. But there has never been a month as ugly and wretched as March 2020. Not one, but two Black Mondays (March 9th and 16th), with a Black Thursday (March 12th), wedged in between for good measure. If you had skin in the game, you spent many sleepless, sweat-filled nights staring at nightmarish, Kafkaesque charts. After the two dizzying drops of nearly 10% apiece, the third and final shock on Black Monday 2, proved too much for some. Grim stories of suicides and leaps from skyscrapers abounded, as always seems the case during the nastiest days of a bona fide Market Crash. The fact that these tales of extreme economic distress arrived simultaneously with horror stories in large urban areas of mass loss of life due to the pandemic, made many of us feel as if the end was finally nigh.
Of course, another remarkable phenomenon that always accompanies every Black Swan event in history, is the bounce back to pre-crash levels. This inevitable bounce, sometimes slow and painfully drawn-out, and yet at other times, lightning fast and V-shaped, certainly makes recovering from the nauseum-inducing events much easier to bear. And such was the case last April and May, as the S&P roared all the way back in the steepest and fastest recovery in its fabled existence. And contrary to what many on Main Street have been maintaining ever since, this epic recovery in market valuations is totally reasonable, and as it should be. After all, we in the professional investing class have been taught that all modern markets are perfectly efficient at present and forward valuations. Given the obvious conclusion that eventually economic conditions would return to normal, and that this return might very well be quite swift, given the unprecedented global actions in combatting the pandemic, the markets were simply proving the Efficient Market theory that is the backbone of modern portfolio management.
Another false notion that seems prevalent amongst those outside of Wall Street, is the perception that all equity stock positions had an absurdly, overly strong 2020, when in fact, numerous charts demonstrate that 2020 was classically bi-furcated, with the overweighted Mega Tech stocks vastly outperforming, while the much larger portion of S&P 500 companies underperformed. And indeed, we as investors all suffered through two more brutal corrections, each about 10%, in early September of last year, and again in February of this year. And now in 2021, the markets have completely reversed, with the value and cyclical underperformers vastly outperforming the mega-growth darlings of 2020.
So now, I suppose the trillion-dollar question at this point is: what next? Even some members of the investing class, many of whom have enjoyed breathtaking, once-in-a-lifetime returns over the past year, are starting to evince creeping doubts in their otherwise bullish comments. Whatever flash points exist up and down our collective “Wall of Worry,” be they the threat of rising interest rates, runaway inflation, or the US Dollar getting too big for its own britches, they are all very real concerns, and each would have potentially dire consequences for equity markets in general. As I write here on the final Friday before Independence Day, the labor figures published this morning are outstanding, and yet another extremely positive indicator demonstrating that the fundamentals of the economic recovery are strong indeed. Certainly, there are political and regulatory risks ahead, and the labor market has a long way to go still.
But as wild and crazy as the past eighteen months have been, it seems as if quite a few of my fellow traders are blind to the larger context of our current economic situation, and this ignorance has afflicted their ability to comprehend the immense strength and momentum of our current markets. In August of 2019, JP Morgan Asset Management boldly declared that “we’re in the early innings of a secular bull market” (Duvalapally, 2019, p. 1). The paper traces the onset of the current secular bull market to February 2016 (Duvalapally, 2019, p.2), but in upcoming posts, I will argue that we should peg the real beginning of our secular bull significantly earlier, specifically January 2013. The term “secular” here refers to the fact that a secular market is non-cyclical and much longer in duration than cyclical bulls or bears. A secular bull or bear market might contain within it shorter terms that are either bullish or bearish, but over the longer timeframe, the standard returns are overwhelmingly positive, such that each secular bull market in our history has generated overall market index returns in excess of 1,000%!
Of course, the question of exactly when the secular bull market began, is more of a scholarly pursuit that perhaps doesn’t demand your full attention; on the other hand, I imagine you might be far more interested in when we might posit an end date? Well, it seems we’re just about out of time here today, but I can tease you with this basic truth: each secular bull market in our history so far, has lasted at least 16 years, and thus until the next chapter, I say: “put that in your pipe and smoke it!”
-Stephen Pierson