Manager's Perspective: Is the next secular bull on its way?
Michael E. Jones, senior vice president and senior portfolio manager of Federated Clover Investment Advisors, sees parallels between today’s market and the one he encountered when he started in the business in 1979 as a rookie investment analyst.
BusinessWeek published its cover story entitled “The Death of Equities” in August 1979, just as I was starting out in the business. The prevailing pessimism and investor behaviors of that time are strongly reminiscent of what we’re seeing today.
In 1979, the Dow Jones Industrial Average was at the same level it had reached 13 years earlier in the heady, go-go days of 1966. Still fresh in many people’s minds was the horrific bear market decline of 1973-1974. While the stock market recovered most of its losses by 1976, it had scared many out at the bottom and left little enthusiasm for stocks among the general public. The ferocious recession of 1973-1975 had abated, but unemployment was still elevated (and going higher, as it turned out). Stocks were cheap by many standards, but they were of little interest to most investors. As BusinessWeek summarized, “Today, the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared. Says a young U.S. executive: ‘Have you been to an American stockholders’ meeting lately? They’re all old fogies. The stock market is just not where the action’s at.’ ”
Then and Now: Similarities
In 1979 and 2012, the stock market averages were lower than the levels they achieved 13 years earlier at the prior bull market speculative peaks (1966 and 2000). The genesis of the similarities between the two time frames lies in the severe bear market panic and difficult recessions experienced just a few years earlier. The market crashes of 1973-1974 and 2008-2009 were similar in magnitude and duration. They left wounds on investor confidence that would not heal for many years. Investors generally shunned equities as “too risky” and sought other investments that were seemingly safer.
The economies of both periods bore some similarities as well. Both recessions brought high unemployment, and the subsequent recoveries were slow and unsatisfying. Recent college grads and unskilled workers found career tracks hard to come by. Our government was in turmoil—perhaps more so in the 1970s, but in both cases we seemed to lack leadership and bipartisan focus on problem solving. Both then and now, there seemed to be insurmountable, critical problems that weighed heavily on our future.
The past is prologue
Given the similarities of “then and now,” we should consider the possibility that the markets might continue to evolve in parallel. The secular bear market of 1966 to 1982 lasted 16 years. The current bear market is only 12 years in length. While the secular bull market of 1982 to 2000 is considered a period of satisfying returns for investors, the market actually performed very well from its 1974 bottom to 1982. For investors who stayed in the game during that period, equities returned 15.8% compound annual gains. Of course, it wasn’t an easy time and the gains were punctuated with three separate market declines of 15% or more along the way. Still, it paid very well to own equities in the second half of the secular bear. Today, stocks have provided 25% annualized gains for the three years since the March 2009 bottom and these gains have been punctuated with short-term corrections of over 15% in both 2010 and 2011. While it’s been a bumpy ride, staying invested seems to be paying rewards in our current era as well.
Just as in 1979, the recent market rebound off its bottom failed to excite the average investor. Pessimism abounds. Enormous sums continue to flow out of domestic equity mutual funds. We should not lament the pessimism, though. It leads to investment opportunities in stocks at reasonable valuations. Today, U.S. companies are in the best financial shape in over 50 years—efficiently spewing profits and cash flow and looming increasingly competitive in global markets.
The next “Secular Bull”
Throughout the history of the stock market, long periods of advancing stock prices (secular bull markets) have alternated with long periods of flat or declining stock prices (secular bear markets). Secular bull markets typically start during periods of great pessimism and uncertainty, which result in low stock valuations. They end during conditions of optimism and high stock valuations. The secular bear market is the painful process of correcting the excesses that built up during the previous bull run.
Is a breakout year like 1982 in our future? In the rosy glow of our faulty memories, the secular bull market of 1982 to 2000 seems idyllic, with double-digit annual gains as the market persistently advanced. At the time, though, very few investors felt we were on the way to such success in the stock markets in 1982. In fact, most pundits, conditioned by the see-saw market action of 1976 to 1982, were pessimistic about the future. They labeled the 1982 breakout illogical and sure to be reversed in a future market correction. No one rings a bell at market turning points!
Of course, all secular bull markets have reversals along the way. Some are related to the natural ebb and flow of economic cycles. Others are more hair-raising, such as the crash of October 1987 and the savings and loan crisis in 1989-1990. Even in bull markets, investors must prepare for a choppy ride.
With today’s sideways market jumping and falling with every new economic data release or European headline, the idea of a new secular bull being around the corner might seem a stretch. But if we shift our gaze away from short-term horizon and think about the long term, based on a reading of history, it’s possible that the markets could break through the old highs established in March 2000 and revisited in October 2007. No one can tell you exactly when. As Mark Twain once said, “History doesn’t repeat itself, but it does rhyme.”
For true investors, picking the exact moment of a breakout is of little consequence. When we buy stocks today, we are getting good value and strong cash flow, all at a reasonable price. That has always been a recipe for long-term success. Stocks aren’t just for old fogies, and three decades later, the stock market is still where the action’s at.