Here’s a quick update on a very insightful graph that was published last month by Visual Capitalist, a digital media brand that uses visualization to make investment themes more accessible. What it shows are the longest bull markets since the end of WWII, based on data from LPL Research. As the chart below reveals, the current bull run is on the brink of becoming the longest. And even though market sentiment has deteriorated somewhat of late, it seems unlikely that the record won’t be broken.
Duration and return
At present, the longest bull market since WWII is the one between 1990 and 2000, which lasted for total of 114 months (almost 10 years). But being the longest rally doesn’t necessarily make it the most rewarding one. Despite a pretty stellar performance, the current bull run is only fourth out of the six biggest post-WWII bull markets in terms of annualized return – based on last month’s figures.
Just one more month
Since the Visual Capitalist was created just over one month ago, we are now just one month away from this bull market becoming the longest since WWII. While a lot can happen in a month, the odds are clearly in favor of the record being broken. In general, major bull markets precede recessions. But the next recession is not likely to occur anytime soon. Global GDP growth is solid and actually increasing in the US, the world’s largest economy. Interest rates remain very low, which, together with the strongest earnings growth in years, enables even the most debt-burdened companies and countries to pay off their debt. Central banks are slowly starting to reduce liquidity, but there is still plenty of money in the system. Historically, these circumstances have led to higher equity prices, not lower.
So, what could go wrong? The economy is unlikely to stall in the coming month (the US could post another quarter of 4% annualized GDP growth), so it would take a severe and swift downturn in investor sentiment to end this rally. A steep escalation in the US-China trade war that sucks in countries like Germany and Japan could trigger such a market-wide decline. Especially if things get so nasty that global growth is expected to drop sharply. This would be bad news for many emerging countries that are heavily dependent on exports (especially now that Turkey and Russia are already under severe pressure), but also for highly indebted companies and countries like Italy. They will no longer be able to ‘grow’ their way out of their massive debts (for some this is already difficult as it is.) This could then lead to higher interest rates, especially given central bank measures to reduce stimulative policy, further impacting growth. The markets will tumble if investors start to anticipate this negative feedback loop, bringing an immediate end to the current bull market.
There are quite a few “ifs” in the downturn scenario described above. But while there is little chance of it actually happening between now and one month’s time, it isn’t totally inconceivable either.