Is Every Bull Market Really Different?
It is the holiday season, finally. Time to celebrate the family and friends we are thankful for. This time next year, my daughter will be returning from college for Thanksgiving dinner for the first time. It is my greatest joy to see her on the verge of entering the world as viable young adult (and my son is not far behind).
People sometimes say that time flies. But it’s not true in this case. Every time I look at her, it’s like flipping through 10,000 photo albums.
How big her eyes got after that first bite of chocolate cake, how carefully she would pick books for bedtime stories, how awful it was when she got bit by fire ants at my cousin’s wedding in Charleston, the time she out-fished me 12–0 at a farm pond, laughing it up with her friends at high-school graduation…
The last 17 years didn’t fly by at all. I was just focused on other things and didn’t notice the calendar pages flipping.
I had an epiphany when she was maybe five months old. I had put her down for a nap and was standing there watching her sleep. “I have no idea who you are,” I thought. “You’re certainly not ‘mine.’ But you are here with me now, and I will do my best for you.”
My dad was a history professor, I have an English lit degree, and my brother has a master’s in theater. So, of course, my daughter is a math wiz. She’s taking AP Calculus, and I haven’t been able to help her with homework since fifth grade.
She’s mostly pretty typical of her generation. She just got her driver’s license (well into her 17th year), she has too much screen time, she doesn’t make phone calls but instead uses Snapchat and text to communicate with her friends. She’s very concerned about her career path (at 17, I thought I was going to be a rock star). She knew more about computers at 10 than I ever will.
People worry about her generation and the millennials a lot. They’ve grown up on screens and don’t have survival skills. They don’t know how to work hard. They can’t think independently. They need trigger warnings because they are little snowflakes…
Well, I’m sure the Greatest Generation worried about their hippie kids. And I’m sure when those hippie kids became parents, they worried about their yuppie kids. I know my parents worried about me and my punk rock friends. People have been saying “these kids today” for a long time.
But like Jeff Goldblum says in Jurassic Park, life finds a way.
Every Bull Is Different
Just so you know, I thought about going with “The Snowflake Bull Market” for that subhead, because I love making fun of that whole snowflake concept. But I thought better of it.
As you know, Wealth Daily is about investing. If you wanted to just read about my daughter, you should probably subscribe to my How Much I Love My Kids newsletter. Anyway, we gotta talk stock market and economy at some point…
This bull market is entering its 11th year. It’s among the longest on record. And investors have worried the entire way…
Of course it’s going to end. Bull markets always do. So does the expansion phase of the economic cycle. But if you listen to the doom and gloom crowd, this market has had two strikes against it since 2010…
The Fed’s quantitative easing was going to spark inflation. Now, that cheap money program has created an asset bubble.
Complacency seems to be rampant. A recent Barron’s survey found that 81% of respondents believe the market will be higher a year from now.
The Volatility Index (VIX) — which measures the premiums for the S&P 500 put options that fund managers use for protection — has been at record lows for months, suggesting there is no fear of downside at all.
Real revenue growth for the S&P 500 has been virtually nonexistent. Earnings per share have grown from increased efficiency and lower share counts due to buybacks. And yet stock valuations have been relatively high for years.
All these things have been true or are true now. And yet here we are. Record highs. At the risk of invoking the wrath of the market gods by uttering the dreaded Four Most Dangerous Words in Investing, I will tell you: every bull market is different.
Repent! The End Is Near!
So what, specifically, is different about this bull market? There’s QE and crazy-low interest rates. There’s tepid GDP growth. The vast majority of trading is now done by computers. We are seeing some new industries emerge.
Bull markets are a combination of liquidity, opportunity/story, and sentiment. If money’s cheap, people will borrow it. If there’s opportunity, they will put that money to work. All you need is people to feel pretty good, and there it is: bull market. This is true for both investors and consumers. Everything else is just noise.
This bull market has had just enough opportunity/story to keep it going until the last couple of years, when some truly bullish stories have finally emerged. I and the other Wealth Daily editors have brought you the investment trend stories like artificial intelligence, autonomous cars, cryptocurrencies, the maturation of social media (one in five page views in the U.S. is a Facebook page), and the acceleration of electric vehicle sales.
Then there are economic stories. Right now, revenue is actually growing for the S&P 500. Regional manufacturing surveys are booming. Semiconductor sales are very strong right now. GDP growth is picking up for the U.S. and the rest of the world. Wages are showing signs of picking up…
Causes for Concern
I’m not sure the super-low VIX is a huge concern. I mean, if you’re a computer-based high-frequency trading firm, you’re in and out of positions all day long. When you’re just scalping for pennies, do you really need to hold S&P 500 put options as a hedge?
That said, the massive amount of computer-based trading, estimated to account for 70% of NYSE volume, is a concern. When the worm turns, it could be ugly.
Will the machines buy? Or will they all start selling/shorting in lockstep and drive prices lower and lower? May 6, 2010, ring any bells? Flash Crash? Dow down 9% in 30 minutes? A 9% drop for the Dow today would be over 2,069 points.
Now, here’s here a little tidbit that’s bugging me: There have been 13 interest hike cycles in the post-War era. Ten of them ended in recession. And the Fed is likely to hike again in December and at least three more times next year.
That’s not to say that rate hikes cause recession. They don’t. Recessions happen when consumer spending falls, thereby impacting corporate earnings. Rising interest rates are designed to slow borrowing and spending a bit. And then some periodic shock to the economic system does the rest.
Obviously, there’s no way to predict when an economic shock will hit. But it’s been a little while since we had one… maybe be on the lookout? In fact, here's a group of stocks I think are in big trouble.
In the meantime, be safe and enjoy your holiday. We'll be here next week, with new opportunities for profits and insights on risks to avoid.
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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