It's Different This Time

It is said that the four most dangerous words in investing are “It’s different this time.”

You hear it in the later stages of a bull market, when the economic engine is humming along, stocks are advancing, and it’s really hard to imagine what could cause a misfire. You heard it a lot in 1999–2000 when the internet was turbo-charging productivity, global reach was suddenly at your fingertips, and opportunity seemed endless…

That was also the era when the Asian Tigers and China really started emerging, even after the currency crisis in 1997. 

I remember Alan Greenspan’s “It’s different this time” moment. Maybe it was in 2004, when he suggested that explosion in derivatives around the world would probably work to spread the risk in such a way that no single entity would end up holding the bag…

That phrase ranks right up there with “Hold my beer” and “Watch this.” Because you just know, as soon as someone says it, something bad is going to happen. It’s like a magical incantation… say it, and you will immediately fall out of the tree or get bitten by the alligator. 

So, I’m going to give it a little twist in the hope that the gods’ sense of irony will let it slip right on by. It’s different every time. 

See, what I’m trying to do is add a little perspective to the phrase. I think substituting the word “every” for “this” makes a big difference. Because, if you just come and say, “It’s different THIS time,” it implies there’s something special about a particular time. There’s something unique. And, of course, whoever says it is suggesting they have managed to discover that they are living in truly unique times. That the rules of history and economics suddenly don’t apply… 

I mean, really? Can I get a lightning bolt please?

The Snowflake Bull

OK, I might be pushing it a little now. The gods definitely don’t like the word snowflake. But I want to make the point that every bull market has unique characteristics in a striking, memorable way. 

As it now stands, the current bull market we’ve enjoyed for the last eight years is often called the Most Hated Bull Market. Seems kinda harsh, considering that the S&P 500 has basically tripled since those sickening lows of March 2009. But haters gonna hate. And I’d say they hate it because this bull hasn’t conformed to most people’s definition of a bull market. 

Only in the early stages of the recovery did we see GDP get above 3%. It’s mostly averaged a bit over 2%. The Fed took unprecedented action and bought bonds like they’re going out of style to keep interest low. The Fed balance sheet is now over $4 trillion. If you dig just a little, employment growth actually looks like crap. Over 10 million Americans have simply dropped out of the labor market. The job market today is about the same size as it was 20 years ago. That’s not really growth. And wages aren’t rising, either. 

Stock prices have been fueled by share buybacks, dividend hikes, and what’s known as “multiple expansion.” Multiple expansion is just a cute way of saying investors are paying more for stocks for no real reason. Revenues aren’t really rising. In 2011, the companies of the S&P 500 sold $1.05 trillion worth of stuff. In 2014, it was up to $1.163 trillion. So far this year, revenue should hit $1.169 trillion. Great. 

Hating this bull market is easy. It’s also been a trap. It’s like when you hear a person my age say, “These kids today, I tell you, they don’t blah, blah, blah. Back when I was a kid…” 

People love to reminisce about some idyllic past that didn’t really exist while they tell you why everything sucks today.

Like, people remember the Reagan years and say how great tax cuts are. But don’t forget the massive defense spending or the massive interest rate cuts that helped push the economy. And Reagan hiked taxes, too. 

Or the Clinton years, the last time the government actually had a balanced budget, a strong economy, and a surging stock market. Yeah, there was the internet, but the U.S. also benefited from massive investment spending from China. Clinton also benefited from Bush’s “read my lips” tax hikes. 

The W. years brought us another economically fueled bull market. Or was it all just a massive housing bubble…

My point here is the same as it was earlier: Every bull market is different. And it’s true for the current little snowflake.

A Gift Horse?

It is very easy see the flaws in the current bull market. I’ve already pointed a few: the jobs market, the Fed, the lack of real revenue growth. Now let’s add a few more negatives to the laundry list. Sentiment is just ridiculously optimistic. Consumer sentiment surveys are wildly bullish. And the Volatility Index (VIX) is just stupid low. According to both, there is exactly zero chance the S&P 500 can sell off even 5%. 

Government debt and deficit spending are clearly unsustainable. Health care costs just go higher and higher, taking a serious bite out of people’s spending power. And the fact that wages aren’t rising makes the added expense particularly painful (see: retail stocks). 

And, to top it all off, the Fed is hiking interest rates and will also start scaling back its balance sheet starting this month. That just can’t be good, can it? 

Actually, I think it won’t be the negative that many people say. Because the rate of action is so small. The Fed’s current plan will take something like 20 years to work off the current balance sheet. And there’s no selling; the Fed will just let bonds mature and send the proceeds to the Treasury. The interest rate thing is similar. Three to four quarter-point hikes a year is not likely to have a huge impact. 

And that’s IF the Fed stays the course. Which is highly unlikely. I mean, at the first sign of trouble, the Fed’s gonna turn accommodative. But that’s not really anything to hang your hat on. More easy money from the Fed is just going to increase the whole “it’s a Fed-driven bubble” talk. 

So, what about the strengths of the current bull market? Yeah, there are actually a few. Like manufacturing surveys that hit 20-year highs. No kidding. 20-year highs. Nobody saw that one coming. GDP hit 3.1% in the second quarter. And it’s on pace to do that again or better the rest of the year. 

Then there’s the global economy, which, amazingly enough, is doing pretty well. The Eurozone is growing, Asia is growing. S&P 500 earnings and revenue are growing. As surprising as it may seem, we are starting to see a kind of coordinated growth in the U.S. and around the world. 

You’re not going to hear too many people say things are looking better for the economy and the stock market. People really don’t seem to want it to be different this time. But the truth is it’s different every time. This bull market is different. It’s a good idea to understand the reasons why.

Until next time,

Briton Ryle

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A 21-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 is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.