The Bull Market’s 10th Birthday Features Plenty of Clouds on the Horizon
(Bloomberg Businessweek) -- So much advanced mathematics is applied to the stock market these days that it can sometimes look like one big physics experiment rather than a basic way for the masses to invest in the fortunes of U.S. businesses. So it’s curious how much attention Wall Street pays to one of the least-complicated math concepts there is: round numbers.
Take the commemorative baseball hats that appear at the New York Stock Exchange whenever the market hits a milestone such as “Dow 10,000” and “Dow 20,000.” Presumably, some hat company has an order on file for “Dow 30,000” lids that it’s patiently waiting to fill. As long as they’re round, even not-quite-noteworthy numbers can cause a sensation, at least temporarily, as witnessed by investors’ current fixation with the S&P 500’s struggle to push decisively above 2,800. Traders often place automatic orders known as “stops” to buy or sell an asset when it reaches a certain price. In theory, they set the price based on an in-depth analysis of fundamental and technical indicators. In reality, it often seems like they just pick a nice round number.
Of course, there are two axes on every stock chart: price and time. And while price is usually where round numbers work their magic, it’s the horizontal time axis that is catching all the attention these days. The bull market in U.S. stocks just turned 10 years old. As comedian Patton Oswalt once said, people shouldn’t get to celebrate every single birthday, but turning 10 is certainly worthy of a party. It’s an even bigger deal in the world of equity bull markets, considering that their life spans require a sort of dog-years calculation to approximate how old they are in human terms. And that’s where things get interesting: We’ve never seen a U.S. bull market live this long. So don’t expect any pony rides at this 10th birthday party; the guest of honor is quite elderly.
While this round number on the time axis hasn’t induced much noticeable turmoil, it’s triggered a lot of reflection and soul-searching about everything that’s changed during the decade—and how much longer we can ride on the back of this aging bull.
Perhaps not too surprisingly, the stocks that powered the rally the most are the ones that have also dramatically transformed our culture and society over the same decade, for better or for worse. Jeff Bezos’ Amazon.com Inc. took a concept as old as America itself—the general store—and turned it into a monster business worth almost three times as much as Walmart Inc., with fewer than one-third the employees. Facebook Inc. has become our town square, the place where we spend hours a week catching up with old friends—and trying not to get conned by hucksters on soapboxes. Google and Netflix Inc. have become our libraries and movie theaters, respectively, while Apple Inc. and its competitors have crammed this entire app economy into something that fits comfortably in the palm of our hands and consumes far more hours of our attention than any of us would care to admit. Quite a decade, huh?
As we mature into this new app-based world order and ponder our investment options for the days and decades to come, it’s hard to ignore the clouds that have gathered over this birthday celebration, calling into question the viability of more than $21 trillion in stock market wealth created in 10 years.
For one thing, the main beneficiaries of this wealth are coming under assault. Thanks to Amazon’s moonshot of a stock chart, Bezos has quietly climbed the ranks to the top spot of the world’s richest people during this bull market, with a net worth in the neighborhood of $140 billion. He’s attracted not only the scorn of President Trump and his supporters in the tabloid media, but also one of the leading candidates looking to dethrone Trump in the 2020 election. Senator Elizabeth Warren, the Massachusetts Democrat who’s long advocated breaking up the big banks, now has made busting up Amazon, Google, and Facebook part of her campaign. “Today’s big tech companies have too much power,” she wrote in a post on Medium. “Too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation.”
Warren faces an uphill battle, and it’s hard to quantify what risk, if any, this threat poses to the stock market. But it’s only one of many clouds gathering. After last year’s tax cut fueled a corporate profit bonanza, aggregate earnings at S&P 500 companies are expected to shrink by 3 percent in the first quarter. Estimates for what was once expected to be robust profit growth in the remainder of the year are fading fast. Economic models from the Federal Reserve are signaling startlingly little growth for the first quarter, and markets-based measures that attempt to predict whether a recession is on the horizon are flashing yellow warning lights.
As a result, many on Wall Street weren’t blowing noisemakers and chugging punch at this 10th birthday party. Goldman Sachs Group Inc. strategists led by David Kostin greeted the milestone with a note of caution. The 10-year run in stock prices left the S&P 500 with a return of more than 400 percent, including dividends, or almost 18 percent a year on an annualized basis. That ranks it among the top 6 percent best 10-year annualized returns in history, according to Goldman’s calculations. The strategists don’t expect that run to continue. They are forecasting that the S&P 500 may end the year more or less unchanged from current levels near 2,750. They forecast it to climb about 9 percent next year, or half the pace of the gains seen during the bull’s first 10 years, as rising wages and other input costs make expansion of record profit margins unlikely.
Fussing too much about those potential problems may not be in investors’ best interest. They’ve seen the bull survive even graver threats during this decade: the European debt crisis; the U.K.’s vote to leave the European Union; the fear that Greece or Italy might too; the political dysfunction that saw multiple government shutdowns and the U.S. lose its AAA credit rating from S&P Global Ratings in 2011; perennial worries about China’s economy and its currency; the crash in oil prices just as the U.S. was rising to the position of the world’s biggest producer; the revelation that foreign actors were using our favorite websites against us to meddle in our elections and sow discord. It’s almost enough to make the case that cloudy weather is when bulls run the fastest, and it’s when things appear to be too sunny—like the beginning of 2018—that an investor should start worrying.
It’s also probably not a good idea to get too anthropomorphic. While this bull may seem like a centenarian in human years, there’s absolutely nothing stopping it from theoretically living to 15, or 20, or 50 years old. Also, there are no official definitions set in stone for what bull and bear markets actually are. Some contend that this bull wasn’t actually born until the S&P 500 set a high in 2013. There are others who’ll argue this bull is younger than it appears because of nasty swoons in 2011 and 2018 that reset the clock. But both of those drops stopped just a few ticks short of what the industry considers the death of a bull and the start of a bear market—when the S&P 500 tumbles 20 percent on a closing basis. Remember what we said about the powers of round numbers?
After a strong recovery rally to start the year, it definitely looks somewhat doubtful that we’ll get to don those “Dow 30,000” caps this year. But there’s a good chance we may wear them before this bull is officially pronounced dead. Don’t cancel that order just yet.
To contact the editor responsible for this story: Howard Chua-Eoan at firstname.lastname@example.org
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