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Happy
Birthday Bull Market! Here's What It Means. |
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It's amazing
what can happen in a year, isn't it? For that matter, it's amazing
how one year can seem so short in some ways, but so long
in others. Either way, we just celebrated the one-year anniversary of the
bull market, which all began - though nobody knew it at the time
- with the market's multi-year low close on March 9th of last year.
What does it
mean, and more importantly, what's next now that we made it to this
milestone? We've got all the stats and data below. Let's just say they're
well
worth reviewing.
In the meantime,
note we've added a blog entry to follow-up on this weekend's newsletter
'Green
Investing for the Non-Speculator'. It's a look at a stock that
didn't
quite fall into the low-risk category, yet still deserves some serious
consideration. Check
it out.
In
short, bull markets - any gain of 20% or more that follows a
tumble of 20% or more - that survive for one calendar year are very
likely to last at least two years. So, we can reasonably expect stocks
to continue rallying to some degree at least through March 9th, 2011. In
fact, the expectation for a two-year bull market doesn't imply enough
optimism.
History Supports
Optimism
 To
give credit where it's due, much of our information comes from BeSpoke
Investment Group ... an outstanding resource of investment information.
Since the 1930's,
we've been through thirteen bull markets. On average, from the beginning
trough to the peak, stocks gained 153% during that bullish span. With a
typical lifespan of 4.4 years, that translates into an average annual gain
of 34% per year during a bull phase.
So where
does the 'two-year' guarantee come from? All but one of those thirteen
bull markets lasted at least two years, and the one oddball from
1948 was so anomalous, it wouldn't be wrong to exclude it from the calculations.
The other twelve all stayed in motion for quite some time after getting
a one-year running start.
To be fair,
the 'average' annual gain of 34% isn't the kind of number one should plan
on like clockwork. That average figure comes with a big standard
deviation, and it may be wiser to assume something significantly greater
or smaller than the middle-ground number. Indeed, the S&P 500 is up
about 70% over the past twelve months... which is not unusual - the first
year of the bull market is almost always the biggest. The second
year's strength typically isn't quite as impressive, and there's no reason
to expect this year to be an exception to the norm.
Still, even
half of a 34% gain is investment-worthy.
Size Matters
 As
for the 'normal' results of the second year of a bull market, that depends
on the size of the stocks you're interested in. According to Sam Stovall
at Standard & Poor's Equity Research, small caps are still the place
to be in the middle phase of a bull market. Large caps gain an average
of 15% in year-two of a bull phase, while small caps tend to gain something
on the order of 22%. His analysis is based on data going back six decades.
While the same
data for micro caps - and even nano caps - doesn't exist, we can
still make a reasonable assumption that the scenario that's better for
small caps than large caps is even more meaningful for the micro
caps out there.
And just for
the record, the early stage of this bull market has been better
for listed stocks the further down the size scale you go. Large caps are
up about 73% for the last 52-weeks, while mid caps and small caps have
gained 96% and 124%, respectively. Not bad? It gets even better
when you dive into micro caps and nano caps - they're up 157% and 214%
(respectively) over the last year.
Extrapolating
Stovall's 'year two' premise of relative strength for small caps, then
anything smaller stands to perform even better this year. Needless to say,
we're excited about finally seeing those opportunities from the micro cap
world present themselves again.
Bottom Line
If the gains
we've seen unfold over the last 52 weeks really are a sham, and you believe
the gloom-and-doomers are right about an economic implosion being right
around the corner, just know that you're fighting a whole boatload of
historical statistical evidence that suggests otherwise.
No, the economy
is far from perfectly healthy, but it rarely is at this stage of
the cycle. As for us, we'll play the odds and continue to view things bullishly,
even if modestly.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
