Bull Market Record, Bull

Dan Wiener: Hello, this is Dan Wiener, chairman of Adviser Investments with another “The Adviser You Can Talk To” podcast. I’m here with Jeff DeMaso, Adviser Investments’ director of research and we’re shall I say gobsmacked by the attention being paid this week to the U.S. stock market’s putative record as longest bull market in history. Jeff, the press has been full of articles about the duration of the current bull market. And many are saying this is now the longest bull market in history. Others are saying, “Hey, wait a minute. Not so fast.” What’s your take on this?

Jeff DeMaso: Well, count me in the not-so-fast camp. But, real quick, let’s just first define bull and bear markets so we’re all on the same page. A bear market is a decline from a high of 20% or greater. And a bull market then just is a run without having a bear market of going down 20% or more.

Dan Wiener: And this is arbitrary, right?

Jeff DeMaso: Totally arbitrary. Just a decline line drawn in the sand.

Dan Wiener: Somebody just made up these numbers and it stuck.

Jeff DeMaso: Yep. It stuck. It’s, uh, it’s what everyone goes by now. But if you take that really strict definition, then this isn’t the longest bull market. The longest bull market that we’ve had in the U.S. would’ve been from 1987 through 2000. So, 13 years. We did see the market fall 19.9% in 1990, and 19.3% in 1998. But by that strict 20% definition, we didn’t hit it. So 1987 to 2000 would be the longest.

But as you said, that 20% line is just totally arbitrary. If you think about the recent bull market run that we’ve had from 2009 to today, well, the market fell 19.4% in October 2011. You could count that as a bear market. Or, if you look in early 2016, the S&P was down only 14% or so. But everything else, small caps, foreign stocks, oil was down from over $100 a barrel to about $25, $27 a barrel. Everything else was in a bear market. So, maybe that counts as a bear market too.

Dan Wiener: So this is sort of a record stock market for the benefit of the media?

Jeff DeMaso: Sure. Absolutely. I mean, the bottom line is, there’s more than one way to measure a bull market and a bear market.

Dan Wiener: So, uh, this bull market, whether it’s the longest or not, and, and I’m in your camp that it isn’t. It hasn’t really generated the kind of returns we saw in the prior bull market. And, and do you have any sense of why that is? And, and does it matter? You know, stocks are still going up. We generated some very nice returns here.

Jeff DeMaso: No, the returns have been pretty strong in this bull market. Since the bottom in 2009, we’re up about 320%, translates into 16%, 17% a year. You know, that is a bit below average, the pace of growth we typically see in a bull market. But it’s still decent. I think we’ll all take those gains. But it is a long way from the 580% gain that we saw from 1987 to 2000. And if you really want to see how big a bull market could be, go back to Japan from 1974 to 1989 the Japanese market went up 1000%. And that’s before including dividends.

But to bring it back to question and where we’re, where I think it going is it doesn’t really matter. You know, we’ve been in this slow growth economic recovery and expansion for years now. And that is factored into this really long advance for stock prices. If you stretch out the economic cycle, you can also stretch out the market advance.

Dan Wiener: You know, whether it’s the longest bull market or not, given that we’re up as much as we are, should investors be considering bailing out now?

Jeff DeMaso: In short, no.

Dan Wiener: No?

Jeff DeMaso: No. I mean, my answer’s not, it’s probably not a surprise. Look, by definition, every bear market is preceded by a new high. So every time we reach a new high, we always get questions from clients saying, “Hey, should we get out? We’re at a new high, they can’t get any better.”

Dan Wiener: Well you know my old line about that is that there’s only two ways you can go once the market hits a high. You either go to another new high or you end up below that high. I mean, it’s just the nature of the math, right?

Jeff DeMaso: Yeah, and you know the nature of markets is that new highs actually signal usually more highs. You know, since 2013, the S&P has hit 202 new highs. If you include dividends, that’s 217 new highs. And so-

Dan Wiener: Not 270 more…

Jeff DeMaso: 271, you’re right.

Dan Wiener: Yeah.

Jeff DeMaso: Yeah. I transposed those numbers. But, look investors have had more than 200 chances to sell at a high and quote unquote be “wrong.” That’s why we think it’s really important for investors, particularly those who are investing for decades, that the bigger risk isn’t that they live through a bear market. It’s that they miss out on an extended bull market run. So investors need to have a plan, they need to have a portfolio that fits their goals and concerns and then allows them to spend time in the market.

Dan Wiener: Yeah, I mean, we talk a lot at Adviser Investments about time in the market, not market timing. Every year or so there is a period where our clients, we’ll have a number of clients ask us, “Is this it? You know, have we hit the peak? Should I be going to cash?” And our advice has been pretty consistent, I would say, over the last 20-plus years that we’ve been managing money for folks. That is, you know, again time in the market. You have to be there to earn the money.

Jeff DeMaso: Absolutely. I, people’s lifestyles change over the course of their life. Your goals and concerns do change, but you really shouldn’t be adjusting your portfolio based off of your kind of gut feel of the market.

Dan Wiener: Since we’re here and we’re talking on this podcast and I’ve got you locked in on the microphone, let me ask you one other question that I think some folks may be wondering about. U.S. stocks have really been outperforming foreign stocks over the course of this market. (With maybe the exception of last year and a couple of periods in between now and, and back in 2009.) But, you know, it looked like the pendulum might have swung back a bit last year, but once again, the U.S. is outperforming. Is diversification dead? I mean, is the notion that we ought to have more you know, at least some of our investible assets in foreign markets, in stocks in foreign markets, is that just thrown out the window?

Jeff DeMaso: No, I don’t … Diversification is not dead. And I think you got it right there. You described it as a pendulum swinging. Look, markets are cyclical. You compare the performance of U.S. stocks and foreign stocks over time and the leadership has changed, it goes back and forth over periods as short as 17 months, to as long as 79 months. But this current run, 129 months long, of out-performance by the U.S. stock market is an outlier in terms of how long it’s gone, that duration. And that’s why everyone thinks that the diver-diversification is dead and it’s lost its mojo. But it hasn’t. It just takes time for that pendulum to swing back.

Dan Wiener: And when it swings back, as, as you know, we did some numbers the other day looking at this. You can have these periods of you know, a year, two years, three years where foreign markets will outperform U.S. markets sometimes by a significant amount. And of course, that’s when we begin to get questions from clients about whether we should have more money overseas, as opposed to less. So, you know … There’s no, there’s no easy answer here because you can’t time the markets and you certainly can’t time when you have your money in foreign markets versus when you have ‘it in domestic markets. Hence, diversification lives.

Jeff DeMaso: Yeah, no, the simple answer we think is diversification. That doesn’t mean it’s easy to always hold that diversified portfolio.

Dan Wiener: All right. Good. I–we’re not going to take any more time. Jeff DeMaso, director of research at Adviser Investments. Thanks for your time today. This is Dan Wiener, chairman of Adviser Investments. And I hope you enjoyed another of our “Adviser You Can Talk To” podcasts.

Jeff DeMaso: Thanks, Dan.