With 2019 ended and 2020 beginning, we are writing a series about
markets and the economy. The series is mainly visual, anchored with
charts, but includes brief bullet point explanations of each chart.
Throughout the series, we examine the current bull
market. We explore why we are at record levels in the S&P 500
and how we arrived here. Our essays to date have addressed the strong labor
market and solid consumer confidence, benign inflation and low interest rates,
and unprecedented late cycle government stimulus which policymakers accelerated
Other essays in this series will examine what’s been interesting and even unique about this bull
market and, ultimately, what threatens the bull market in 2020 and
beyond. Today, we jump into what’s
been interesting about this bull market, particularly its uneven
performance. To read the previous essays
in the series please visit our blog.
Bull markets always have leadership. In the case of this long bull, the leader has
been the technology sector. From the
bull market’s beginning on March 9, 2009 through year-end, the technology
sector experienced price appreciation of over 650%.
Bull markets also tend to have lagging sectors
and in our current bull market, the most severe example is energy, which has
increased just 38.88% from the bull market bottom.
Most of energy’s gain happened within a couple
of months from the bottom. And since its
peak in 2014, energy has been a serious loser.
Another, albeit less severe, performance gap has
occurred in growth versus value stocks.
Growth stocks tend to have a higher rate of earnings growth, a higher
price-to-earnings ratio and a lower dividend yield – vice versa for value
From the bear market bottom, growth has
outperformed value by well over 100%.
Until 2015, value hung-in, however, from there,
growth exploded, leading to the considerable divergence. Not only energy, but financial, consumer
staple and industrial stocks have held value back, while technology stocks have
The third remarkable divergence of the current
bull market is the performance of U.S. stocks (S&P 500) versus the
performance of developed market international stocks (MSCI EAFA) and emerging
market international stocks (MSCI Emerging Markets).
Emerging markets rebounded first and strongest
from the bear market bottom, but in the summer of 2011 suffered a big fall
related to the European Debt Crisis. Then,
EM held its own for another year, but never retook the 2011 highs and withered
into 2016. EM rebounded into 2018, but
fell apart again, only recently regaining traction. Developed international followed a very
similar, although less dramatic, pattern.
This goes to show the difficulty of market timing.
All the while, the U.S. S&P 500 blazed a
rarely interrupted path higher culminating in the 2019 melt-up.
Make no mistake, these have been
powerful trends. An investor, when
sticking to a discipline, should always get some right and some wrong. For instance, we have a U.S. bias, but we
also have a value orientation.
Regardless of the power of these bull market trends, they surely will
not last forever. It’s vital that investors understand that tremendous risk
and volatility will someday
return to the stock market.
Additionally, many of the above trends will someday reverse
themselves. For example, international
and value will probably lead over the next decade. This won’t
start on January 2, 2020, but the next ten years will surely bring a very
different stock market from the last decade.
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