Dissecting Today’s Bull Market
By Russ Koesterich
January 27, 2012
In response, some investors have apparently rediscovered their appetite for risk. Since November 29th lows, global stocks are up roughly 9% and emerging market equities have gained about 12%. And during the past eight weeks, high yield bonds have risen roughly 5%.
In fact, this week some market watchers have declared that we’re in the midst of a bull market. For example, the WSJ’s MarketBeat blog, noting that bullish sentiment is on the rise, says “Welcome to the New Bull Market,” or at least welcome to a continuation of the bull market it says started in March 2009.
It’s important, however, to put the current “bull market” in context. There’s a big difference between various types of bull markets. In secular bull markets (like the one we experienced from 1982 to 2000), stock prices rise over a long period of time thanks to ongoing improving fundamentals. Cyclical bull markets, on the other hand, can occur within both secular bull and secular bear markets, but tend to be shorter in duration.
In my opinion, we aren’t in – and aren’t entering — a new secular bull market. Instead, we’re still stuck in a long-term secular bear market that began in 2000. It’s not as if the problems that haunted investors last November — a European crisis, a political divide in Washington, slow growth in developed markets and a potential banking crisis in China — have gone away.
Equity performance from 2003 to 2007, however, shows us that there can be relatively long rallies in secular bear markets. I believe the rally we’re experiencing now is actually a cyclical bull market that could easily go on for the remainder of 2012, assuming the European crisis doesn’t take a turn for the worse and we don’t experience other unforeseen market shocks.
Distinguishing between secular and cyclical bull and bear markets is so important because of their different investment implications. In secular bull markets, investors can rely on a traditional buy-and-hold strategy. In secular bear markets and accompanying cyclical bull markets, however, having a more tactical approach (i.e. a timeframe of five years or less) can help investors take advantage of market peaks and valleys and potentially avoid having investments merely move sideways.
So what’s a tactical investing idea for the current cyclical bull market? Well, let’s look at the investment implications of the Fed’s announcement this week. First, it suggests that nominal rates and real rates will stay low for a long time. This further buttresses the case for gold. Second, if US interest rates are going to be anchored at zero for an extended period, people are going to need to take some risk — in one form or another — to generate a decent return.