Investment Strategy: A History Lesson

“The bull market needs a pediatrician, not a mortician.”

... Doug Ramsey, The Leuthold Group (12-14-17)

In 1981, The Leuthold Group was founded by the sagacious Steve Leuthold. It is an independent stock/economic research firm that produces disciplined, quantitative financial and contrarian financial research for investors. The research team is led by CIO Doug Ramsey, who is one of Wall Street’s best and brightest. Recently, however, Jim Paulsen left Wells Capital after 20 years to join the eagle-eyed Leuthold Group. We have read Jim’s prose for years and have always found it to offer some of the best investment insights around. In fact, in recent history, Jim and I were on CNBC together advocating similar investment strategies, but I digress.

Last week, we read an article on CNBC’s web site with the title, “Strategist Doug Ramsey: The bull market needs a pediatrician, not a mortician,” which is a fabulous quote! The byline read, “Leuthold Group's Doug Ramsey says the bull market is getting older, but that doesn't mean it doesn't have room to run.” Doug goes on to say:

One of the longest bull markets in history showing little sign of slowing down... It is now the longest cyclical bull market on record. We're closing in on potentially a ninth birthday next March. It's now the second-most expensive market of all time: We’re still, on most measures, not all, but on most measures we’re still well below the highs that we made in March of 2000.

We agree, but we take issue with the statement “One of the longest bull markets in history,” as well with the statement, “It’s now the second-most expensive market of all time,” a point we have argued against in these missives for years. Ladies and gentlemen, secular bull markets last 15+ years and tend to compound at around 16% per year. For example, the 1949–1966 secular bull market lasted 17 years and took the D–J Industrial Average from its June 1949 low of ~161 to the bull market high of ~995 in February 1966. Were there pullbacks? You bet. The President Kennedy steel crisis of 1962 lopped 26% off of the Dow in about three months, but the bull market persisted. From the 1966 peak, the Industrials were range–bound for 16 years (until 1982). Now, if your definition of bull and bear markets is a 20% rally, or a 20% decline, in that 16-year rangy stock market there were 13 tactical bull and bear markets. However, that is NOT our definition of a secular bull market.

In 1982, the Dow broke out of that 16l–year rangel–bound market and commenced the 1982–2000 secular bull market. Hereto, there were pullbacks, the biggest being the 1987 Crash, but that did not end the secular bull market. In fact, most of the indices were marginally higher in 1987, and the secular bull market extended for another 13 years. In the spring of 2000, the 1982–2000 secular bull market ended and the senior index was again range-bound for 13 years, until April of 2013. The problem many pundits have is they cut off the 1949–1966 secular bull market in 1956 when Egypt tried to take over the Suez Canal and the Industrials lost some 26%, but that did not stop the secular bull market. Again, said gurus cut off the 1982–2000 secular bull in 1987 because of the Crash, yet that too did not end the bull market!