The new long-term bull market ahead

By Anatole Kaletsky
July 18, 2013

The bull market in global equities that started in the dark days of early 2009 passed a historic milestone this week. When the Standard & Poor’s 500 Index closed on Monday at 1682.5, this did not just represent a new record high and a full recovery from the swoon that Wall Street suffered after Ben Bernanke’s “tapering” comments in late May. More importantly, Monday’s record close marked the first time this key Wall Street index exceeded by more than 10 percent its peak at the climax of the last great bull market in March 2000.

Why is this important? Because a breakout this large from a trading range that has confined the stock market’s movements for many years is historically a rare event. In fact, there have only been three occasions in the past 100 years when prices have risen 10 percent above previous long-term peaks (which I define as peaks that have remained unbroken for at least five years). Each of these major breaks —  in July 1925, December 1954 and October 1980 — has confirmed a structural bull market and been followed by very large gains for long-term equity investors: 189 percent from 1925 to 1929, 245 percent from 1954 to 1973 and more than 1,000 percent from 1981 to 2000. Of course, past performance is not necessarily a guide to future results and three events are insufficient to draw statistically reliable conclusions. Nevertheless, the shattering of Wall Street records this week seems significant in several ways.

The S&P 500 is by far the most important stock market index and tends to set the direction for all other markets around the world — and history reveals that large breakthroughs, like the one that occurred this week, are very different from marginal new highs, which have been much more common and have often given false signals. There have been dozens of cases where long-standing records were broken by 2 or 3 percent and several of these were followed by large losses instead of further gains. This happened most recently in 2007, when the S&P 500 squeaked through to a new high just 2.5 percent above the 2000 record and then promptly collapsed during the Lehman crisis.  By contrast, large breakouts of 10 percent or more have consistently produced large gains.

This history, on its own, might not be worth remarking, since three events hardly qualify as a “pattern,” if it were not for some fundamental explanations suggested by this experience.

The three previous breakouts, in 1925, 1954 and 1980, have occurred at intervals of roughly 30 years and it is now 33 years since the last such event. So the mere passage of time suggests that a new structural bull market may be due around now. More importantly, the alternation between bull and bear phases has been related to political and economic upheavals of historical proportions. The three long-term bear markets of the 20th century were related to World War One and the Russian Revolution, the Great Depression and World War Two, the great inflation and the energy crisis of the 1970s. The transitions to bull markets happened when these crises were subsiding, even though few contemporary observers realised this at the time. In 1954, there were still widespread fears of a return to pre-war depression and even of a victory for communism in the Cold War. In 1980, almost nobody expected inflation to be tamed by Ronald Reagan and Paul Volcker or for the oil shock to go into reverse. Yet investors on Wall Street got wind of these improvements and stock market prices started to set new highs well before the good news was confirmed. Could something similar be happening today?

We know with hindsight that the origins of the 2008 financial crisis and the great recession that followed could be traced back to the start of the last decade, when incomes stopped growing  for average American and European workers and their living standards could only be maintained through reckless credit expansion and the accumulation of unsustainable debts. It seems reasonable, therefore, to view the whole period since 2000 as one of long-term structural deterioration and economic failure. Conventional wisdom maintains that this dismal period is still far from over and the structural obstacles to economic growth remain as daunting as ever — deteriorating demographics and weakening productivity, government deficits and unsustainable households debts, global imbalances and so on.

Yet there are signs that these structural impediments are gradually dwindling, especially in the U.S. Demographic prospects are improving because of immigration reform. Productivity breakthroughs are coming as manufacturing and computer technologies converge. Household balance sheets have strengthened and the U.S. government’s deficit problems have been resolved, although a long-term challenge remains in controlling healthcare costs. Global imbalances have been largely eliminated, with the U.S. current account deficit down from 6 percent of GDP to 2.9 percent, according to IMF projections, while the Chinese surplus has shrunk from 10 percent to 2.6 percent and Japan’s surplus has almost vanished.

None of this means that the U.S. has fixed all its problems or that smooth sailing for the world economy lies ahead. Even if the U.S. recovery continues and strengthens, as it probably will, new crises may be brewing in China and Europe. But the world is always a dangerous and unpredictable place, which is why it is often said that “bull markets must climb a wall of worry.” This old investment adage is again being proven true.

PHOTO: Traders work on the floor at the New York Stock Exchange, July 17, 2013. REUTERS/Brendan McDermid

8 comments

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“the U.S. government’s deficit problems have been resolved” – What are you smoking now Kaletsky?

Posted by keebo | Report as abusive

It is estimated that the total U.S. obligations, supported only by the confidence of a world audience that believes we will in fact meet our financial commitments here at home and abroad (treasury bonds purchased), now exceeds 220 trillion dollars. This is not just a small financial hill to cross over, it is an insurmountably high ice capped mountain that cannot be successfully climbed even in the long term and it will display its real face in the months ahead in 2013 and early in 2014, especially as many hundreds of astute businessmen pull millions of their shares of stock out of the market place owing to an increasingly weak U.S. dollar.

Posted by joe10082 | Report as abusive

In spite of the knowledge by every thinking individual that the recession is far from over (unemployment is still much too high in many regions, millions of Americans lack basic savings, let alone solid retirement funds, and housing prices are still on the decline, despite reports to the contrary), looking at none of the realities and focusing only on past economic behavior, as you’re attempting to do here, leaves one scratching one’s head as to the conclusions.

The 1925 breakout happened a mere four years before the biggest depression of the modern era, which was only recovered from by the infrastructure building of WWII (and post WWII). The 1954 breakout was followed by the recession of 1960-61, and then the recession of 69-70, and then again in 73-75. The 1980 breakout happened during a recession and was also followed by yet another recession in 1981-82 and later in 1990-91.

Absolutely, these breakouts are a sign for the well-informed. Hardly history pointing in the upward direction, though.

Posted by MediaSimp | Report as abusive

Hey you guys ARE smarter than this commenter, I guess you should cash out of stocks and sit on the sidelines!

Posted by Benny27 | Report as abusive

When does the bull market begin – before or after we’re all bankrupt?

Posted by UScitizentoo | Report as abusive

Well, it is indeed a market. And it level at all times high is a result of bull-der-dash money printing. So, from a certain point of view, it is a bull market. The real measure of the economy is employment which is at all time lows.

Posted by BidnisMan | Report as abusive

Monsieur Anatole is mumbling.

I don’t see the point. What’s point? That five-year troubles of many people made balance sheets better? It is a very old thought. A common place, actually. It was expected that paying off debts, public and private, would be pivotal for the end of the recession.

” Global imbalances have been largely eliminated.” They have. We know that corporation profits are huge. That mergers made the corporation stronger. That efficiency and further rationalization have been invested heavily.

What is missing in the article? The explanation what is going to be a New Economic Model?!

I say: Kaletsky is mumbling.

Posted by OUTPOST2012.NET | Report as abusive

The bull market is really there.
Only it will last as long as the Dow Jones Industrial rockets and we foresee a potential up to 21,000 or + 35% that could be reached within a year.
21,000 is the level of the Quaterly Bollinger band which is flat and thus is the high risk level.
Therafter a huge correction is unavoidable, down to 13000 or -38%, for the Bollinger Bands are too wide to allow further expansion in 2014.
So we gotta be sectors pickers. We favor Semiconductors, Biotechnology, Pipelines, Japan, Malaysia.

Posted by MAESTRADE | Report as abusive