Faded Photographs: Obituary Of A Bull Market – Leuthold Group
We’re always impressed with those lengthy, and unnaturally eloquent, obituaries that pop up online within minutes of the passing of an elderly celebrity or public figure. Ahhh, we think to ourselves, there’s that rare journalist who didn’t scramble to make deadline (no pun intended). Fortunately, we’re obscure enough that we’ll never merit our own pre-packaged epitaph.
What would happen if such an obituary were mistakenly leaked before the passing of the celebrity subject? How eerie would it be to read an objective, arm’s length summary of one’s life while still alive? We hope to never find out. But such an exercise might be fun when applied to another subject, specifically, the late (or rather, the latest) cyclical bull market in stocks (b. 2009—d. 20XX).
How will today’s bull market be viewed through the eventual clarity and objectivity of hindsight? Herein we’ve pulled together several still frames that we think best capture the essence of this historic run. (To maximize the effect, run each page through a fax machine to produce the nicely faded, black-and-white images that might accompany an obituary.)
Still Frame 1: Birth
The cyclical bull market was born among the worst of historical times for humankind, but among the best of times for… well, bulls. In particular, the sire of all great bulls (the S&P 500 5-Year Normalized P/E) had collapsed from 34x, exactly nine years earlier, to a mere 10.5x on March 9, 2009. And, by no coincidence, the cyclical bull was born that day in New York City at 4:00 p.m. ET.
Professionally-formulated developmental programs like ZIRP and Quantitative Easing were credited with the precocious bull’s astonishing progress, along with psychological support later in life from a special girlfriend, TINA (There Is No Alternative). But those who knew the bull best never heard him thank the providers of this generous assistance. He thanked nature, not nurture—and pointed to the exceptional circumstances surrounding his birth. Few of his ancestors, he admitted, had been lucky enough to spring from a second-decile Normalized P/E reading… such a favored starting point almostguaranteed his life would be a remarkable one. And in fact, a small Minneapolis research firm found that a Normalized P/E sample extracted on the day of his birth would be consistent with future 10-year annualized S&P 500 total returns of more than +13%. The bull would soon shatter even that seemingly bold projection.
Over a remarkable career, the bull managed to lift the S&P 500 Normalized P/E from its lowly, second-decile roots up to a rarified, ninth-decile reading of 21.3x on April 30, 2015—knowing all along the feat would sow the seeds for his own demise.
Bull Market – Still Frame 1: Birth
Bull Market – Still Frame 2: Everybody’s All-American
The bull grew up an All-American boy who loved cheeseburgers, french fries, and baseball… and hated soccer. His provincialism was characterized by indifference, not necessarily disdain, toward foreign stock markets. Although foreign stocks had also been blessed with excellent, low-P/E genetics, the bull was jaded by an early playground scuffle involving several well-dressed, smooth-talking classmates of Greek ancestry. (They had cheated on an important math test.) That incident convinced him that earnings underlying foreign stock market P/E ratios were markedly inferior to his own. He was right.
The bull’s nationalistic pride didn’t emerge until roughly the age of two, but as the years went by it became too obvious to ignore. By the end of April 2015 (at an age of six years and two months), the domestic bull had produced more than a tripling (+212%) in its flagship S&P 500 index, while foreign stock markets—whether Developed or Emerging—had managed only a bit better than a double. The bull considered this fair punishment for the foreigners’ fiscal irresponsibility.
The bull’s home-country favoritism gave rise to an ever-expanding valuation premium, with the U.S. market, in the spring of 2015, reaching a Normalized P/E ratio six points higher than that of foreign Developed Markets, and eight points higher than Emerging Markets. Those lower valuations sowed the seeds for better relative foreign-stock returns on a three-to-five year horizon—a development the bull doubted he would live to see.
Still Frame 2: Everybody’s All-American
Bull Market – Still Frame 3: The Big Spender
Any lingering doubts surrounding the bull’s All-American authenticity were soon dispelled by his wild spending habits. The bull had been angered by birth announcements citing “The New Frugality,” the “Frugal Future,” and the “New Normal” that promised to cap his discretionary outlays for the foreseeable future. “The best revenge is to live well,” thought the bull, and he and the Kardashian sisters embarked on a shopping spree that would take the S&P 500 Consumer Discretionary sector up nearly fivefold from its bear market low.
Specialty retailers, restaurants, and car dealers—all of which had dutifully downsized in keeping with the “New Normal” thinking—were caught off guard (and understocked) by the ferocity of the spending binge, and each year’s sales gain flowed straight through to the bottom line. Just as the spree seemed to be winding down in 2014, a plunge in the price of fuel allowed the happy shoppers a final flight to the Mall of America aboard the Kardashian jet.
Despite his ostentatious purchases (including an Apple watch), the bull never failed to acknowledge his humble roots. Discretionary stocks, he noted, had tripled in price simply to reach their historical medianPrice/Cash Flow ratio. But here the bull’s historical proclivity toward excess reappeared, and the sector moved to a record multiple of 15.5x Cash Flow in March 2015—versus 4.6x at birth.
Bull Market – Still Frame 3: The Big Spender
Still Frame 4: The Steroids Era
On a spring day in 2009, a cab driver mistakenly dropped off the newborn bull at the home of the New York Yankees, rather than the New York Stock Exchange. The bull decided to join a locker room tour rather than head back downtown, and later felt a stabbing pain in his backside as he left the training facility. The next day, stocks were up 3%, and a four-year addiction to “the juice” had begun. At first, the bull denied using any stimulants, then later claimed they had no effect on his performance. The injections merely sped up his recovery from corrections, he argued. But (as shown in Still Frame 4) lab tests showed a 98% correlation between the bull’s progress and the level of MGH (Market Growth Hormone), which was later determined to be a dangerously potent combination of the total assets of all Federal Reserve banks. The evidence was undeniable.
Eventually, the New York Yankees and the New York Federal Reserve staged a joint intervention, whereby the level of artificial stimulus administered to the bull was “tapered” over the first ten months of 2014. By May 2015, the bull had been drug-free for six months… though he’d become increasingly dependent on longtime friend TINA for psychological support.