Longest U.S. Bull Market Ever Means Nothing

Summary: We’ve hit the longest economic expansion and bull market in U.S. history, but it can continue, in our opinion. The market endured a terrible growth scare over October-December last year and again pulled back during May on concerns about tariffs. These worries were ultimately overwhelmed by a combination of ongoing strong economic conditions, and a Federal Reserve that appears willing to act to support equity prices. The possible resolution of tariffs is helping this morning. The duration of economic growth and the bull market are often cited by those predicting a downturn, but current conditions remain favorable, in our opinion.

This Time Different or Each Time Different?

“This time it’s different” are fateful words, and normally best recognized as a warning sign. Our view is that the economy is strong, the consumer is in a good place, and American companies remain very innovative. The global political situation is also relatively stable, simmering tensions between the U.S. and Iran notwithstanding. This should be a good time for companies to do well, and thus the market to perform, and that’s exactly what we’ve seen as gains in 2019 have built on previous years. Yet, we constantly read in the financial media alarmist predictions of losses and economic catastrophe. Every possible conflict or sector-specific weakness is heralded as the possible pivot point away from the current positive conditions. We have also read a lot about the average length of the economic cycle, how long a bull market is supposed to last, and attempts to predict future market moves based on the current valuation of stocks compared to historical levels. These articles normally support a cautious conclusion because we don’t have examples of elongated economic cycles or bull markets from our past. On the contrary, we are bullish and optimistic because of what we see happening right now in the economy and because U.S. companies are so innovative.

Figure 1. The longest-lived bull market since 1854. The S&P 500 has gained 331% or a 10.25 CAGR of 15%.

Are we saying this time it’s different and the economic cycle won’t turn? No. Something we’ve observed in 20 years investing in stocks, analyzing companies, and guessing about the economy is that comparisons to similar stocks, companies, or economic environments can often be misleading. The lesson for us is that rather than base investment decisions mostly on comparisons to similar scenarios (which is very tempting) it is better to approach each as if it were unique. In other words, we don’t argue that the current economic expansion and bull market should continue because this time it’s different. Rather, we argue that the best approach is to start with the assumption that each instance is different. When we look at momentum in the economy, innovation and the development of new technology and the creation of value in the U.S., the state of the world and the U.S. consumer, we see good things.

Behavioral Finance 101: Our Brains are Pattern Seeking Machines

Averages, charts, technicals, past performance, mean reversion, momentum, etc. We are not experts in behavioral finance. That caveat aside, as we understand it, behavioral finance is the idea that our brains were created by evolution in the natural world and these hardwired instincts continue to influence our behavior today, notably in making investment decisions. This manifests most frequently in emotional decisions like desire for gains and fear of losses. More importantly, it is apparent in our brains’ tendency to find patterns in information and similarities across situations even when there are none. Our brains do this because identifying patterns in the natural world conferred evolutionary advantage. For example, being able to recognize the features of rivers and streams that correlate with where it’s best to fish aided in the procurement of food. In finance and investing however, this same hardwired instinct to connect to the dots can lead us to find patterns and draw conclusions, even when the data doesn’t contain any. This brings us back to our main theme, which is a suggestion to treat each situation on its own merits.