Will this Bull Market Ever End?
Updated: Feb 20
Eoin Beecham, Sector Manager at University College Dublin Student Managed Fund
It is the age-old question: When will the bubble pop? Many have tried, and failed, to predict when a market downturn will come. Recessions in the US have occurred roughly every four years since the year 1900. This is a gross misrepresentation of recent times, where monetary and fiscal policy has led to the extension of bull markets and the mitigation of bear ones, counter-cyclical economics in action. But even still, in a recent Harvard Blog article that quoted David Geibel, a senior vice-president of Girard Wealth Advisory, who remarked that it now lasts roughly 100 months. But as of now, we are entering the twelfth year of a bull market, the longest in modern history. The question is, how long can this keep going?
Recessions have historically occurred for three reasons. Firstly, a spike in commodity prices as witnessed in the oil crises of the 1970’s. Secondly, an overly intrusive monetary policy, which occurred in 1981-82 where the Federal Reserve significantly raised interest rates. Thirdly, the example which may apply here, is the over-inflated valuations of stocks. It occurred in 1929 within the Great Depression, once again in the 2001 Dot-Com boom and then again in a slightly different sense within the 2008 Great Financial Crisis. It is the third example that can most likely apply to today’s events, where despite the US officially being a recession, we have seen equity prices continue to rise.
With regards to the overvaluation of equities, the often overlooked factor is a psychological one. Underpinning all these market corrections, is a degree of uncertainty and doubt. Equities are inherently a speculative asset, if consumer confidence is high and the economy is within a period of growth, there is no reason why equity prices should not keep increasing. In the last nine months, we have seen a galloping stock market whilst the rest of the economy has experienced the sharpest drop-off in economic activity since the Great Depression. There has been a disconnection between the markets and the economy and ultimately a breakdown of the Efficient Market Hypothesis. This is no more epitomised by what can only be called a frenzy in the markets by retail investors over the past few weeks. The University of Michigan measures consumer sentiment month-by-month, where it sits at its lowest levels since 2014. So why is the market still increasing despite all these signs? Ultimately, it comes down to the availability of credit. Central Banks across the world have enacted unprecedented monetary stimulus.
The US Congress has already spent $4 trillion fighting off the woes of this pandemic, with the Biden camp eyeing another $1.9 trillion of stimulus. This would measure up as 25% of US GDP in 2019, an eye-watering figure. The once out of favour Keynesian economics has come roaring back into fashion. Household incomes have increased by 6% in 2020 whilst unemployment has hit 15%. Due to interest rates and bond yields being close to zero, investors have looked for yield elsewhere, inflating asset prices around the globe.
It is nigh on impossible to predict when the markets will fall, but there is a growing uncertainty around what the future holds. The Federal Reserve recently expressed their worries that further stimulus would overheat the economy. Inflation is the biggest worry here. Rising prices may force the Fed's hand into raising interest rates, which could be catastrophic given the corporate bond programs many companies have been engaging with throughout 2020. Bond yields are slowly ticking up and despite no major CPI inflation yet, many economists see it on the horizon. Having to increase interest rates just as the world is recovering from the effects of the pandemic could leave countries reeling, with further stimulus possibly only leading to further dreaded stagflation.
Ultimately, one cannot predict a market crash. Given the cyclical nature of financial markets, it is not a matter of if, but rather when. But the timing of such a downturn is the tricky part to foresee. Many have claimed to have done so in the past, but even a broken clock is right twice a day. The only answer is the mitigation of one’s risk. Copying the likes of Ackman, Buffett, and Munger, value investors who have lived and survived through numerous recessions and downturns. Investing in resilient companies who are evergreen so to speak. The value investing that has fallen out of fashion in some circles may become the talk of the town now. But to answer the question of this piece, will this bull market come to an end? As always, it is not a question if or how, but rather when.
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