Running with the bulls

Market takes pause, but I’m still optimistic

The bull market turned eight a few months ago, and while I don’t know how that converts into human years, I’m pretty confident that it’s quite an advanced age. Not a record-setter, yet — that distinction belongs to the October 1990 to March 2000 period, when the S&P 500 gained more than 400 per cent. Some of you might remember how that bull died; for those who don’t, suffice to say it wasn’t pretty.

I am old enough to recall the beginning of the end for the ’90s bull, and one of the things that characterized it was that those of us who followed markets at the time really didn’t recognize it, or at least not for a while. Part of the reason was, frankly, that we had drunk deep of the New Economy Kool-Aid — all that talk of telepresence and online pet products had us convinced the sell-off that started in March 2000 was just a correction.

(As for the New Economy thing, I would argue it wasn’t that we’re wrong, just that we were two decades early. Which amounts to the same thing, I guess.) To some, questioning the never-ending ascension of All Things Internet, which was driving the amazing bull, would have been heresy.

Another reason for our nonchalance might also have been that the bull took so long to retreat. Almost a year passed before the S&P 500 fell 20 per cent (technical bear territory), and it took 30 months for it to decline by almost 50 per cent. Of course, the tech-heavy Nasdaq took a much bigger hit, but let’s assume that your average investor held a more diversified portfolio. By comparison, the shorter bull market of 20022007 ended violently: the S&P 500 shed half its value in a mere 17 months. Of course, it started violently, too, with a global financial meltdown.

Today, North American stock indexes are sitting at or near record highs, but the bloom seems to have faded a bit recently. The S&P 500 closed last week by barely eking out a gain; the S&P/ TSX composite hit a sixmonth low in the middle of last week. Maybe there are short-term reasons for the market wobbles — mounting political uncertainty in the U.S., along with some weak economic data; slumping oil prices hitting the energyheavy TSX, and so on. And the Dow Jones industrial average hit yet another record close.

But is it possible the recent market weakness is a sign the bull is running out of steam?

The easy answer is, nobody knows.

To even ask the question might seem heretical: corporate earnings have been strong, the U.S. Federal Reserve seems confident the American economy — which, let’s face it, drives ours, too — is on a firm growth trajectory, and Canadian GDP seems to be going through the ceiling. (Admittedly, it’s a pretty low ceiling.)

Also, there’s the fact that interest rates remain low, even if the Fed is raising and the Bank of Canada is hinting that it might. Low rates are broadly supportive of equities. So is the reality that central banks are in a hawkish mood, and money that flees bonds has to go somewhere. Remember what happened last November, when everyone expected the Fed to raise rates after the election of Donald Trump? Bonds got torn up, and equities soared.

And yet, there are niggles. One is just the historical example: every bear market in the history of markets has ended. Another is that stock market participation in the States is approaching record highs, prompting the suspicion that there’s a lot of dumb money (no offence) out there. As Warren Buffett famously said, “Be fearful when others are greedy.”

Granted, arguments based on market history always seem to have an air of superstition