Running of the Bulls

This summer, like every summer for the last 600 years, saw the annual Running of the Bulls festival in Pamplona, Spain.  This summer, like every other summer for the last 10 years, saw the continuation of this current bull market for stocks (“current” assuming no unmitigated disaster between writing and press time).  In point of fact, August marked the longest ever bull market in the US - our very own running of the bulls.

Bull markets are somewhat ironically defined more by what they aren’t than what they are.  As long as stocks don’t drop more than 20% from a peak, a bull market keeps running. If they drop more than 20%, the bull market gets posthumously dated to the last peak and all of a sudden you’re in the middle of a bear market.  Or they don’t get backdated and you have to wrap your head around having lived through a Schrodinger’s Cat market that was technically both bull and bear since the last market peak.

Not to worry though!  Shortly after setting new records for longevity (3,453 days and counting as of the mid-August record), the S&P 500 surpassed its January 26th levels to reach a brand new all-time high, so this bull market still has legs.  Probably.

Probably, because while this has been the longest (and 2nd-best!) stock market run ever, it has also, at the exact same time, been the weakest ever economic recovery.  So there’s a chance they might be the legs of someone who survived a childhood battle with polio.

There’s a saying - “bull markets don’t die of old age”.  It means that length of time is not a valid reason to be wary of stocks - not even when that length of time is the longest ever upswing in an essentially cyclical pattern.  No, it means that, like their brethren in Pamplona, what kills bull markets is a surgical strike between the vertebrae that pierces the heart. A strike that tends to be delivered, ironically enough, by the Fed raising interest rates but could theoretically be caused by any number of things - the Fed, trade wars, inflation, a geopolitical crisis, impeachment proceedings from the House after the midterm election, Mercury in retrograde...Given the run up stocks have had in a relatively soft economic recovery, a full-on recession isn’t a necessary condition for this bull market to come to an end.

Somewhat counterintuitively, this is actually good news.  For the vast majority of people, exposure to the stock market comes through employer retirement plans like a 401(k).  If stocks decline, that’s going to suck for a little bit, but it will recover and in the meantime you’re continuously investing that 401(k) contribution from every paycheck at lower levels that will have better future growth prospects.  The worst thing that can happen to your 401(k) is not that the value goes down - it’s that you lose your job.

Stocks are priced pretty perfectly (and alliteratively!) at the moment.  There’s a lot of assumptions about lower interest rates and elevated profit margins and corporate buyback programs baked into current prices.  But here’s the thing - if those assumptions are correct, if interest rates stay low and automation keeps corporate profit margins high and the Fed starts easing again if the economy looks soft...if that’s the case, then maybe we get to find out if there actually is such a thing as death-by-old-age for a bull market.

Is running with the bulls a risky proposition?  Probably. Would we do it anyway? Of course. Are we talking about Pamplona or the stock market?  Yep.