Historic Highs What Now?

Jun 29, 2020 2:34:00 PM / by Jonathan Blau


On March 20, 2020, near the apex of investor, financial media, economic forecaster and big brokerage firm catastrophism, Fusion counseled our clients to take advantage of what we identified as one of the five best opportunities in the past 50 years. Admittedly, we weren’t predicting the 10 week rebound approaching 50%, which immediately followed The Great 2020 Panicdemic.

Many outside investors watched the opportunity slip away in continued disbelief. Worse still, many sold into the opportunity and caused significant harm to their wealth and potentially to their retirement. The good news is that we are still in the middle (or earlier) of what is likely the greatest secular bull market in history. Therefore, for those who did not have or did not follow a plan, there is a second chance to get back on course. Successful investing is always a tug-of-war between one’s faith in the future and fear of it. Almost invariably, without a tough loving, empathetic investment behavior coach at the anchor, the investor’s war is lost. 

Where do stocks go from here? 

Higher. Much, much higher! 

Why do I think this? Because, contrary to conventional wisdom, we are likely in the relatively early-to-mid stage of what will possibly be known for many generations, as the longest and strongest bull market in history. How could this be? Didn’t the bull market end earlier this year when its decline exceeded 20%? Well, kind of, but NO! When a stock market’s price trend is shorter term, it is referred to as cyclical. Conversely, long-term market price trends are called secular. I am convinced that the recent 30+% decline was a classic cyclical (short-lived and shallow) bear market within what might be the most powerful, continuing and strengthening secular bull market. 

There is a discernible market pattern of which the financial media, economic forecasters and the vast majority of investors and investment advisors are unaware. The pattern or cycle begins when the 

market reaches a euphoric, greed-based bubble top of historic proportion. The first such modern-day cycle began with the bubble top formed during the roaring ‘20s in 1929. The pattern is marked by four distinct events: 1. The bursting of the bubble and resultant initial bear market (September, 1929-June, 1932); 2. The dramatic recovery approaching pre-bubble levels (June, 1932-March, 1937); 3. The second full bear market (March, 1937- April, 1942); and finally, 4. The nearly two decade long secular bull market (June, 1949 – November, 1968). These secular bulls ONLY end in a greed-based, euphoric, fear of missing out (FOMO) buying frenzy. 

The second time this cycle appeared was at the dramatic bubble top during the “go-go” market era in 1968. The bubble burst and the resulting initial bear market ensued from November 29, 1968 – May 26, 1970. Then began the FULL recovery from May, 1970 – January, 1973. The second full bear in this cycle began on January 11, 1973 and ended on October 3, 1974. The period immediately following this saw a six-plus year gain of 126%. Then, after a brief pause, came one of the most powerful, least expected and least believed bull markets from 1982-2000 (about two decades long). 

This wonderful pattern coexists with us as I write this, for only the third time in modern history! 

Let me start by stating (as illustrated above) that I have learned that it takes two full (broad and deep) bear markets to wipe out the excesses of a historic bubble top. Once the second bear goes into hibernation, a restless and unstoppable two decade bull can’t wait to escape his chute! 

The bubble top that all who are reading this piece are familiar with, not anecdotally, but experientially hit its apex on March 24, 2000. The first of the two bear markets needed to wipe out the excesses of this bubble (which began inflating nearly two decades earlier in 1982) growled from March 24, 2000 – October 9, 2002. Then, perfectly according to this pattern’s script, the market FULLY recovered from October 9, 2002- October 09, 2007. Then came the mother of all SECOND bear markets to appear in these cycles (bubble top, first bear, full recovery, second bear, uncontrollable bull). This second bear mauled investors from October 9, 2007 through March 9, 2009. Then, came our friendly, uncontrollable bull for his two decade frolic and he has been frolicking happily (with few, if any investors by his side) for roughly the past decade. What does this mean? It means, to complete this pattern, he will likely be frolicking this way, for the better part of this new decade. If you have not already, I suggest you join him in earnest, lest you become part of that daunting statistic — revealed by the Williams Group wealth consultancy research — showing that 70% of wealthy families lose their wealth by generation two and 90% of them lose it by the third generation. For ignoring, shunning or mistaking this unmistakable bull for a bear will seal one’s fate accordingly. 

Need more evidence? 

Investors have been net sellers of domestic stocks to the tune of $71 billion in 2020, through last Wednesday. In 2019, Investors were net sellers of domestic stocks to the tune of over $167 billion, which was a record since Lipper began tracking fund flow data in 1992. What’s fascinating about that fact is that 2019 was the second highest returning year in the longest and strongest bull market in history. In this greatest bull market in history, the investor has essentially been absent. In a decade-long state of continual fear, he liquidated domestic stocks in no fewer than 8 years of the dramatic 11 year run. Long before we ever heard the term coronavirus, the investor had been responding to a very positive economic and market environment with abject terror – unable to contain himself from panic selling, even against one of the best market and economic backdrops in history. 

The trailing 20 year (2000-2019) annualized return for the S & P 500 is 6.01% per year. According to Barron’s, the average trailing 20 year return since 1928 is over 10.5% per year. A lot of additional market return is needed to catch up – or even come close to — those historic, long-term, average returns (reversion to the mean). Most investors will continue to have their wealth contaminated by the raw sewage that the serial catastrophist financial media spew out, focusing on the “now” and missing out on a comfortable retirement and/or meaningful legacy! 

Finally, the most recent American Association of Individual Investors survey shows investor bearishness at 49% (close to 70% higher than the historical average of 30.5%). Bullish sentiment is 24.1% (over 40% below the historical average of 38%). Investors are also sitting on historically high levels (roughly $5 trillion) of cash. These conditions are very often precursors to strong prospective returns. 

With pessimism and cash near record levels and a lot of return needed to catch up to long-term averages, we have all of the ingredients for the resumption of what could be the greatest (relatively young) of all secular bull markets. Any interim cyclical bear downturns will be viewed by us as a gift (opportunity to add to equity holdings at higher dividend yields and higher expected returns). 

None of the great two decade long bull markets has ended on investor pessimism, but rather on extreme euphoria! 

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

Sir John Templeton


On behalf of the entire Fusion team, my deepest gratitude to our special client base – and to those who entrust us to guide their clients — for your continued faith and trust. Without the mutual respect and trust that we are so fortunate to share, success would elude us. The many thoughtful emails we received from you – our clients – as we helped you to successfully navigate this crisis were genuinely heart-warming and deeply appreciated. Your thoughtful feedback is our true dividend. We thank you! 

Wishing you all a safe and happy July 4th holiday! 

Tags: Latest Insights

Written by Jonathan Blau