I’m sure by now you’ve had the time to digest the never ending headlines about an 8-year anniversary of a bull market for the S&P500. The problem with all of them is that the S&P500 has NOT been in a bull market for 8 years. In fact, there is a very strong argument to make that it could have just hit its one-year anniversary. Also, let’s remember the motivations of the people who are suggesting that the S&P500 is entering the 9th year of a single bull market. In a majority of cases they are purposely misleading you for personal gain.
It’s important to identify that the one single reason these people are using is actually a small technicality that they are irresponsibly pointing out and choosing to isolate as the sole basis for this conclusion. The single reason they are using to suggest that the S&P500 is entering its 9th year of a bull market is because in 2011 the S&P500 fell only 19.38% from peak to trough on a closing basis and not 20%. Again, let me stress that this is the ONLY data point they are using to claim we are in an 8-year bull market. And to make matters worse, their reasoning is because it fell 19.38% on a closing basis and not 20%? WHAT??
Let’s address the issues here one by one. First, 20% is a completely arbitrary number. I’m not sure who made this up, but there is zero logical reason why a 19.999% correction is considered still a bull market while a 20% correction is considered a bear market. It’s obvious to us as market participants how clinically insane someone needs to be to make this claim with a straight face.
Next, let’s point out the fact that anyone claiming that this is a bull market in the S&P500 is blatantly choosing to ignore reality. They are trying to convince you that this is a bull market simply because the S&P500 Cash Index fell only 19.38% while the S&P500 futures fell over 22% and on an intraday basis the S&P500 Cash Index also fell over 20%. They are cherry picking this one specific vehicle to make outlandish claims that are self-serving. They get to lie in a headline so you either click/watch/listen or in other cases they skew their “research” to help achieve their own goals, like get attention and/or help raise assets. It’s unfortunate, but their motivations clearly do not align with ours as market participants and they make it obvious.
Bear markets are an extended period of stock index declines where over time the majority of stocks in that index participate to the downside. In other words, this is a market of stocks, not just a stock market. In 2011, almost 70% of stocks in the S&P500 had corrected over 20% from their peaks. Also, by the beginning of 2016, 63% of stocks in the S&P500 had corrected by over 20% from their top. So twice, a majority of components in the S&P500 had corrected dramatically, arguably entering bear markets. To suggest that these periods were bull markets is not only incorrect, but I would argue is an irresponsible statement to make by anyone who experienced trading in those markets. Here is a good chart showing these bear markets sent to me by Todd Sohn over at Strategas:
To continue with this theme of cherry picking indexes that fit your narrative while blatantly ignoring the important facts, let me direct you to the S&P500 Equal Weighted Index. This treats each component in the index exactly the same, giving us a much better gauge of market breadth. Remember, in order to maliciously try to mislead you, they are choosing to use the S&P500 Market Cap-Weighted Index to determine Bull & Bear Markets using their arbitrary 20% level as the threshold. Meanwhile, in 2011, the S&P500 Equal Weighted Index fell over 25% from peak to trough. They conveniently leave that point out in their “research”. Also, if you really want to be picky and use only closing prices, once again the S&P500 Equal Weighted Index fell over 23% from peak to trough on a closing basis in 2011. But the irresponsible parties will look at you in the face and tell you this doesn’t count: “We must only use the S&P500 Market Cap Weighted Index, and we must only use the cash market, not futures”:
Next, let’s remember that the S&P500 is not “the stock market”. These people cherry picking this one single index, and only the S&P500 Cash Index, not S&P Futures (how convenient), are blatantly ignoring the rest of the world. While a majority of S&P500 stocks were getting killed throughout most of 2015 (because we were in a bear market), the rest of the world was selling off by much more. By January of 2016, Emerging Markets were down 45% from their peak in 2011. Was that a bull market too? Europe and Japan each fell around 30% from their 2015 highs. Were those bull markets? The Russell3000, which represents approximately 98% of all investable assets in the United States equities market fell 23% from the 2011 highs. Was that a bull market? The ACWI (All Country World Index) fell 27% in 2011 and 22% in 2015. Bull markets also?
The bottom line is that we’ve had plenty of bear markets since 2009. This is NOT the 9th year of a bull market. So when did it begin you ask? I think there are a few good arguments to make, much better ones than cherry picking this one S&P500 index (and only cash, not futures). One that I like is the breakout in 2013, when prices finally got above the 2000 and 2007 highs. A valid argument can be made that this was the start of a new secular bull market and the end of a 13-year bear market that began after the boom of the late-90s. Here is that chart:
Another argument can be made that a bear market for stocks ended in the first quarter of 2016 and a new cyclical bull market began. This is when Emerging Markets bottomed out after 5 years of declines. The entire metals and energy complex also put in their bottoms during this time (not a coincidence). Japan, Europe and the United States (S&P500) bottomed in February of last year, right around the same time. Credit spreads, which we look to for confirmation of ongoing trends in stocks put in their bottom at the same time. This was NOT one big giant coincidence. This was when market participants globally reached a point where demand finally was able to exceed the selling pressure that we had seen persist for a long time, which some might refer to as “a bear market”.
Playing devil’s advocate, you might say, “Well JC the S&P500 represents America and American investors, so we use that index”. OK, let’s go with that for a second remembering that you are specifically cherry picking the S&P500, ignoring every single other US Index and International Index and also ignoring the fact that intraday the S&P500 fell over 21% in 2011 and the futures market also fell over 20%. But to suggest that the S&P500 represents American investors is also wrong. This is money coming from all over the world, not just the United States. With each day that passes, the stock market is is becoming more and more global. So if you want to know what the stock market is doing, it would be irresponsible to focus on just one cap-weighted index in just one country.
In order to help identify the direction of the underlying trend in stocks I have taken the top 10 exchanges from all over the world, and created an equally-weighted index of all 10 of the world’s largest exchanges, including both developed and emerging markets. We’re talking not just U.S., but Germany, UK, Japan, Canada, Brazil, China, etc. You can see that twice over the past 8 years we have seen corrections in global equities of over 28%. These are not characteristics of bull markets when stocks lose nearly a third of their value TWICE over the period you are claiming is an 8-year bull market. Shame on you.
So when you see people trying to convince you that we are in the 9th year of a bull market, this is further evidence that their goals are NOT aligned with ours as market participants. The media loves the headline, and don’t care whether it’s correct or not. Then there is the sell side trying to make you feel bad for not keeping up with this “bull market” so you can move your assets to their firms. There are also examples of people commentating that are just wrong, and don’t actually have any malicious intent. But I would argue that is the rare exception, not the rule. More often than not, people are trying to fool you for their own personal gain, whether dollars or clicks (that lead to dollars). I live my stock market life assuming everyone is completely full of it, and then give them the chance to prove me wrong. Most don’t.
The irresponsible don’t let facts get in the way of their narratives. Winners ignore that noise and instead focus on reality. Data mining and cherry picking to create an alternate reality is not for us.
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