Portfolio Update: The Ending of a Secular Bull Market?
A look into the 1970's, the early 2000's and now
Secular bull and secular bear markets are not discussed as often as they should. Investors have nightmares and horror stories about the losses that usually accompany a secular bear market and on the contrary, stories of incredible gains during the very end of secular bull markets. Investors are wise to understand the market cycle, where we are in the process and position our portfolio accordingly.
This week, we are going back in time, taking the lessons learned from the past and identify where we are at in today’s market cycle. By the end of today’s newsletter, you should have an actionable outlook for the future. In addition, I will update members on my portfolio’s outperformance bench marked against both index’s and high beta ETF’s.
Looking forward, I will provide a midweek memo on Wednesday which will cover CPI, macro outlook and the market’s direction in the near/long term. For future portfolio updates, subscribers can expect to continue seeing the release in their inbox on Monday morning. Today was an exception due to a work conference I had in Chicago over the weekend.
1942 A Bull Market is Born
The Roaring 20’s was a spectacular time. Following World War I, the United States of America experienced a re-birth and a cultural revolution. American business was booming, the stock market was going up and it even got to a point that speculation within stocks became the norm. The thought process was, “how could you lose” or our investor favorite, “it’s different this time because…”
To further fuel this speculation, Americans began taking out loans on their homes, against other stocks and various other assets that they owned to buy stocks on “margin”. Until September of 1929, the bull market that began in the late 1800’s had finally ended in epic fashion. Stocks commenced to falling 90% before finally bottoming in 1932. The economy was never quite right the years following after the collapse of the largest asset bubble in U.S. history.
This boom and bust has been repeated multiple times throughout history. Bull markets create bear markets and bear markets create bull markets. In fact, in Howard Marks “Mastering the Market Cycle” he reminds us of a very important detail when it comes to market cycles. It is not that the bear market is created because of a negative catalyst, it is created (as it has always been) by investor confidence. On the contrary, rising investor confidence is what creates bull markets in the first place. It is the peak of that confidence that inevitably leads to the bust.
In Many Ways, Our Economy and Stock Market Resembles the 1950’s and 1970’s
In December of 1941, Japan invaded Pearl Harbor which brought the United States into World War II. Coincidentally, this was also the moment the United States would exit out of the Great Depression. America got back to work. Government spending surged, American Men would serve over sea’s and the women back home would work the factory jobs for the men who left for war. The result was the beginning of an economic boom, thus the beginning of a new Secular Bull market.
The war officially ended in 1945 and America, once again, experienced a boom in growth. Pent up demand coupled with disposable income, new wealth and a desire to spend, the 1950’s created a memorable time for many American’s, coining the phrase “America’s greatest generation”.
Good times create bad times and bad times create good times, the point I am trying to make is that the cycle becomes nearly predictable. By 1966, the secular bull market ended but the real bust happened in with the collapse of the “Nifty 50”, or the 50 hottest growth companies.
The Nifty 50 was a bubble in its own despite these being high quality businesses, many of which are around today. Their valuation expansion peaked in 1972 where stocks like:
Johnson and Johnson P/E of 57
McDonalds P/E of 71x
Disney P/E of 72x
Baxter Labs P/E of 72x
Polaroid Corp P/E of nearly 100x
Reached extreme valuations. The 1972 bear market was historic as the S&P saw the 2nd biggest decline of it’s time and was the 3rd biggest decline in history, declining 50%+. Many of the nifty 50 declined 60%, 70% or 80%. Sound familiar?
Much like 1929, excess speculation led to over inflated asset prices. Couple this with the end of a market cycle and the beginning to a recessionary, stagflation, period of the 1970’s and it destined for a lost decade.
The Next bull Market, Beginning in 1982, Ended in Historic Fashion
The inflationary, stagflationary, period of the 1970’s left many investors overly pessimistic about stocks. The thought was, at the time, that it was nothing more than a gamble when bonds would return 10% - 15%. Why would you take that sort of risk? At the end of the day, the thought was, that it was nothing more than gambling.
Ronald Reagan became President, beating Jimmy Carter, in 1981. Raegan’s pro business economic policies, coupled with Paul Volker’s heroic (painful) actions combating inflation, led to a low inflation, economic revolution in the 1980’s and 1990’s. During this period, technology began taking hold and the world was adopting color TV, cell phones, and more importantly, the internet.
Just like matters of the past, excess speculation, euphoria, and years of economic expansion led to a bubble similar to that of 1929. As you may know, the bubble didn’t exist in all stocks. Within years, investors saw life changing returns in many of tomorrows new, revolutionary, companies. The internet stocks.
Following the bubble implosion in the stock market, the housing market shortly followed after. This collapse, however, created a recession so great that it rivaled the Great Depression and it would have become “the next Great Depression” if not for the U.S. Governments historic fiscal and monetary response.
Secular Bull Markets Fuel Secular Bear Markets
We need to bring this full circle and assess where we are in the cycle today.
The narrative today is perfect for the beginning of a secular bear market. Fed is raising rates, inflation is extremely high, a global pandemic, economic recession (contracting GDP), and oil shocks. Many investors believe that now is the beginning to the next 50% decline in the markets and the beginning to a lost decade but it’s missing one thing that previous major market tops had, prolonged/excess speculation.
The speculation of 2021 was very short lived and crushed by the Fed. In fact, we can assume that the Federal Reserve, and artificially low interest rates, is what fueled that bubble in the first place while put to a screeching halt in November, 2021. What’s more interesting is that institutions (who are the ones that fuel bubbles to unusual heights) did not seem to follow or push the markets up in a major, meaningful, way as a whole. The bubble in this case was relatively isolated in only one area of the market.
ARKK’s innovation fund is the poster child of the bubble that has engulfed the markets the past 2 years. It wasn’t just ARKK that did this either, it was nearly every small cap stock, biotech’s, and other extremely speculative assets, like Crypto currency. More or less, this area of the market does not have significant exposure to the economy that could fuel a negative chain reaction. It was an area of the market that excess liquidity fled to and inevitably left.
Secular Bull Markets March Higher, Despite Bad News Because Human Nature is What Creates Secular Bull/Bear Markets.
This secular bull market officially began, depending on who you ask, in 2009 (or 2012). For the sake of consistency, we will call the bottom of 2009 the beginning of this market. From 2009’s bottom, we have roughly 12 years between us. Previous bear market bottoms to bull market tops time frame:
1942 - 1966: 24 years
1974 - 2000: 26 years
If we apply the philosophy, as mentioned in the beginning, that it is the nature of the secular bull market (excess optimism) that fuels the recipe of the secular bear market (prolonged pessimism) we can assume that we are roughly half way through this secular bull market.
Hear me out, it isn’t just quantifying the amount of time from start to finish that leads me to believe we are in the middle of a secular bull market. It’s the overall remembrance of the secular bear market of 2008 that leads me to believe the complete equation for a prolonged bear market to take hold. It appears that it’s a generational behavior that determines the major market cycles in equity markets. It appears that it takes a generation of only seeing the stock market going up for excess speculation and euphoric behavior to really become consensus even among portfolio managers.
By applying this principle, we can assume that investors born in the 1990’s (like myself) and early 2000’s will be what fuels the next bull market top. We can assume that the mid 2030’s will be the beginning of the next secular bear market but not before historic gains, with a historic blow off top, are made. Today, my generation just doesn’t have enough wealth to truly move markets, yet. Today… smart money has lived through the devastating bear markets of 2001 and 2008.
Preparing My Portfolio for Both Gains from the Secular Bull and a the Strategy to Navigate the Next Secular Bear
I have mentioned before that this Newsletter is just the beginning to what I plan on doing with BluSuit long term (maybe I may change the name some day?). The mission remains the same, navigating the market on both the long and short side of things to create true generational wealth. Let’s take a look at my portfolio’s recent multi-month out performance and my strategy moving forward.
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