Did The Old Secular Bull Ever Die?

Includes: SPY, XLK
by: Eric Parnell, CFA


Is the secular bear market still ongoing?

Or did the secular bear market die in 2009?

Or, better yet, is the secular bull market that started all the way back in 1982 still ongoing today?

It is a consensus view even among the most bullish investors in capital markets that stocks entered a secular bear market with the bursting of the technology bubble in 2000. Instead, the debate among the bulls and the bears that follow secular market patterns focused on whether the latest secular bear market ended with the market bottom back in March 2009 (the bulls) or remains ongoing through today (the bears). While I have long been firmly in the bear camp on this debate, another perspective that has been largely overlooked may also merit consideration. In a lurch beyond the most bullish of the bulls, what if in fact the most recent secular bear market never happened at all? What if instead the secular bull market that began in 1982 never ended and remains very much intact to this day? If this is indeed the case, what might this mean for capital markets going forward?

Among The Most Insightful People On Seeking Alpha

I have long contended that some of the most insightful contributors to the Seeking Alpha community are those that write in the comment sections of the articles found on the site. For those of you that are regulars on Seeking Alpha and read beyond the end of the articles, they are names that you likely have come to know well and value their opinions even if you disagree with their views.

One such commenter is an individual of whom I have never met in person or even spoken to over the telephone for that matter since we live on opposite coasts but has become a very good friend since our first e-mail exchange on Seeking Alpha nearly five years ago back in 2011. He is known on Seeking Alpha as Retired Colonel, and his commentary along with the insights that he takes the time to share both publicly and with me individual are tremendous.

In one such recent exchange as a follow up to a recent article that I had written on whether we are still in a secular bull or secular bear market, Retired Colonel contacted me with the following possibility that I had not previously considered. In summary, his point was essentially the following: what if we never entered into a secular bull market back in 2000 in the first place? What if instead we are still in the secular bull market that began all the way back in 1982? And if this is indeed the case, what are the implications if the May 2015 top actually represents the start of a new secular bear market. An absolutely fascinating set of questions worth consideration.

Considering A Third Possibility

How could it possibly be that we never entered into a secular bear market starting in 2000? After all, during the decade of the 2000s, we had two major market corrections on the S&P 500 Index from 2000 to 2002 and again from 2007 to 2009 that were in excess of -50%. Clearly, this either was or still is a secular bear market that made the previous 1966 to 1982 secular bear market episode pale in comparison. And for those in the "still in a secular bear market" camp, the recent burst higher off of the 2009 lows has been nothing more than a reflex response from an otherwise still ailing patient to the hyper stimulative forces of aggressive monetary liquidity injections. Otherwise, the stock market would still be stuck in its sideways trading range that began at the turn of the millennium.

But what if neither side is right? What if even the bulls have been too pessimistic in this regard. How can a continuing secular bull market even be possible? Here's how.

Instead of focusing on the S&P 500 Index (NYSEARCA:SPY) as our market benchmark, let's instead consider the NYSE Composite, or NYA. Why the NYA instead of the S&P? It is a broader index in terms of its composition at more than 1,800 stocks versus just 500 for the S&P. But perhaps more notably, the S&P 500 includes a blend of stocks from the New York Stock Exchange and the NASDAQ, while the NYSE Composite only includes stocks from the NYSE.

Why would focusing on NYSE stocks only matter in the context of secular market cycles? After all, a number of highly established companies including several of the largest in the world currently trade on the NASDAQ. It matters for the following reason.

Historically, the older and more established NYSE has generally been the home for relatively more stable and well-established stocks, while the newer NASDAQ has hosted a greater share of more speculative companies such as those found in the technology and biotech sectors among others. While this differentiation is far less distinct today, it still exists to some extent and was much more well defined a couple of decades ago.

A Quick Walk Back Through Time

This leads to the following quick walk back through time. Let's return to the technology bubble of the late 1990s. At the time, it was commonly referred to as the "tech heavy NASDAQ" and was disproportionately weighted to technology stocks (NYSEARCA:XLK). The NYSE, on the other hand, was home to the older, more established companies across most of the remaining nine market sectors.

Thus, when the tech bubble burst starting in 2000, it was the NASDAQ that bore the brunt of the decline. To this point, while the NASDAQ collapsed by -78% from peak to trough from 2000 to 2002, the NYSE only declined by just over a third at -38%. Still a big decline, but not necessarily catastrophic.

Why does this matter? Because if you were among the investors that thought the technology bubble was sheer madness and stood clear of the sector during its ride higher and back lower, your experience during the period from 2000 to 2002 was far less painful. Such an investor that was focused on stocks found in the NYSE fit this description. And more importantly, your uptrend was never broken during the correction. By only owning NYSE stocks, you never reached as high as the S&P 500 during the rise, but you also did not fall nearly as much during the correction.

But isn't this an unrealistic assumption that investors would have stood clear of the tech bubble at the time? Not at all. After all, a well known octogenarian investor from Nebraska, who shall go unnamed in this article for no other reason than his name gets beaten to death in the financial media, simply did not buy tech stocks because he did not understand them. And my own grandfather for whom my investment firm is named often proclaimed in the years leading up to his passing in 2001 that one of his investment rules was that he only bought stocks that traded on the New York Stock Exchange. These are just two examples to highlight the point that not everyone was caught up in the tech bubble and its sky high valuations at the time.

Reincarnating The Old Secular Bull

Suppose one simply removes an allocation to tech stocks over the period from 2000 to 2002 from the broader market picture. This can be done by focusing on the NYSE Composite instead of the S&P 500. And while the NYSE and NASDAQ have converged in terms of their composition in the years since, suppose we stick with the NYSE Composite going forward through today simply for continuity's sake. This provides us with the following picture.

Instead of a sideways trading pattern, we have an uptrend that has remained very much intact since the start of the new millennium. We have a series of successive higher highs first in 2000, then in 2007 and finally in 2015. And while we do see a lower low at the bottom of the market in 2009, it proved fleeting and not long enough where one would declare that the uptrend had been definitively broken.

In summary, through the lens of the NYSE, the secular bull market that started in 1982 would still be considered to be very much intact. Is it fair to simply remove a major sector of the market during an extended period of important time in market history? This is certainly subject to debate. But what it suggests is that there are a good number of experienced and savvy quality and value focused investors in the marketplace today that have been riding an uninterrupted bull market for more than 30 years running now.

Implications Of The Super Secular Bull

If indeed we are still in a secular bull market that began more than three decades ago, what exactly is driving it? A good case can be made for interest rates. For as the chart below demonstrates when considering the NYSE Composite on a real price basis, stocks fell during the 1966 to 1982 secular bear market along with rising interest rates and inflation, and have rallied since 1982 along with declining interest rates and disinflation.

This brings rise to an important point. Many have been calling in recent years for the inevitable secular reversal higher in interest rates. If this indeed comes to pass, it may place a detrimental weight on stocks going forward.

Perhaps counterintuitively, stocks may also suffer a downside weight if the economy transitions from disinflation to outright deflation as it has been trending in recent years. One has to look no further than the experience of Japan over the past quarter of a century to see what a deflationary market scenario looks like.

Another factor that might lead to May 2015 marking the end of the super secular bull market would be if global central bankers including most importantly the U.S. Federal Reserve were to change course on their philosophy surrounding monetary policy. Clearly this is still not coming to pass as demonstrated by Chair Janet Yellen's commentary from Tuesday, but we may arrive at a juncture where central bankers no longer believe that artificially inflating asset prices and putting a "put" under the market the way they have since the market crash of 1987 is the best way to generate economic growth going forward and may actually be destructive instead. It is also possible that a change in monetary policy philosophy may also be imposed on central bankers by force if markets start pushing interest rates higher on their own.

But even if we are still in a super secular bull market that began more than three decades ago, this still does not imply that today's stock market is completely out of the woods. Stocks today are trading at high valuations that have only been reached on less than a handful of occasions in history, and they are doing so in an environment where annual corporate profits have been declining for more than a year and are expected to do so well into the current year. And even if stocks were able to maintain their uptrend in the current challenging environment, it would still imply the possibility for stocks to fall back below 7000 on the NYSE Composite, which is roughly -40% below its May 2015 peak and roughly -33% lower than its current price. And this is in the context of a cyclical bear market within an ongoing secular bull market scenario. If events were to unfold that sent stocks into a new secular bear market in this context, even greater downside should be expected.

The Bottom Line

The old secular bull market in stocks that began in 1982 may in fact have never died. Depending on your investment perspective, it may still be very much intact more than three decades later. But even in this more than bullish view, it does not mean that today's market is not without meaningful downside risks. The stock market is still open to fairly wide swings even if this secular bull market remains intact. Thus, investors should still stand at the ready even for potential future periods of cyclical weakness. For while it may not seem like a long time, two to three years of portfolio losses can be psychologically difficult to weather even after a more than thirty-year climb.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.