Coronavirus might just derail bull market marathon
Human tragedies like the COVID-19 virus are a sorrowful backdrop for an anniversary celebration.
It was 11 years ago this week that U.S. stocks hit bottom after a 50% plunge tied to the Great Recession, only to embark on what was to become one of the longest and most profitable bull markets in history. Since early March 2009, the average American stock has climbed nearly fivefold in a bull run characterized by a relative absence of drama. Until the last few weeks, that is. Except for brief episodes like those when the Federal Reserve threatened to hide the monetary punchbowl, or the Trump administration saber-rattled on the trade war, declines of between 10% and 20% — the usual definition of a market correction — have been scarce. At one point last year, a key measure of equity market volatility had been cut in half.
And after the Fed abruptly changed course and began slashing interest rates last fall, stocks took off on what could turn out to be the final leg of the decadelong rally, an uninterrupted straight-up climb that smacked of market-topping complacency.
If it really is over, it’s been a good run. According to The Stock Trader’s Almanac,
the 2009-20 bull market (as measured by the S&P 500) is more than twice as profitable and more than twice as long as the average since 1948. During the postwar period, only the 1987-2000 bull market had greater longevity and generated a larger gain.
Slow growth kept inflation in check
It might seem incongruous to associate a strongly above-average bull market with a decidedly below-average economy. Between 2009 and 2019, the U.S. economy grew by an average of just 1.9%, well below the 3.4% average of the previous 63 years.
But the economy’s loss was the equity market’s gain because the tepid pace of growth kept inflation under control and allowed the Fed to keep interest rates below their historical norms in both real and nominal terms. At 128 months, the growth phase of the 2009 business cycle is the longest in U.S. history and conforms to a pattern of longer expansions that began in the 1960s.
According to data from the National Bureau of Economic Research — a private nonpartisan group charged with dating business cycles — those shifts have occurred in three distinct stages: from 1854 to 1919, from 1919 to 1945 and from 1945 forward.
Since 1961, expansions have averaged 78 months compared to just 30 months for the previous 26 expansions beginning in 1854. Over the entire post-World War II period, 87% of all months have fallen during the expansion phase, versus 58% of all months prior to 1945.
The longest expansions on record occurred in the 1960s, 1980s, 1990s and 2010s, periods that correlated with activist monetary and fiscal policies. At 4.6% of GDP, the current U.S. budget shortfall is nearly 2 percentage points above its average since 1969.
Different types of shock
Recession-related bear markets generally begin with a demand shock as rising interest pricks a bubble in a store of wealth. In 2008, the bubble was in real estate; in 2001, dot-com stocks.
But if an economic downturn develops in coming months, it will have started with a supply shock, the first major one of its kind since the dual oil embargoes of the 1970s.
With supply chains already struggling to adapt to the U.S.-China trade war and further disrupted by the coronavirus, shortages are sure to develop, leading to plant closures and layoffs, which in turn could trigger a demand shock that lower interest rates cannot directly offset.
It is worth noting that about onequarter of U.S. businesses do not offer their employees a single day of paid sick leave, increasing the odds for communitywide transmissions of COVID-19 that would amplify the unvirtuous cycle of a supply-to-demand shock. In a worstcase scenario, a supply/demand shock could cause 1970s-style stagflation, as product shortages drive up consumer prices just as falling incomes and household wealth reduce economic growth.
Even before the coronavirus spread widely outside China, some researchers had concluded that the well-documented inability of economists to forecast recessions was due in large part to the inherent difficulty of predicting shocks to the financial system.
If this week’s appropriately subdued marking of the 2009 bull market turns out to be its last, there will be one more reason to think they might be right.
Tom Saler is an author and freelance journalist in Madison. He can be reached at tomsaler.com.