This month, the bull market officially celebrated its five-year "anniversary."
For some reason people think that's a big deal. It's almost as if the rally's birthday has led analysts to believe it's finally old enough to get in trouble.
How ridiculous.
There have been 25 major bull markets throughout U.S. history. Each of those runs has lasted about 900 days (2.5 years) on average -- with the longest spanning almost 14 years (1987 to 2000). The SP 500 gained an average of 103% during each of those periods.
The current bull market period ranks fifth on that list in terms of length, coming in just short of the index's 5-year rally from 1982 to 1987 -- which ran longer than the current rally by a matter of days.
But if someone tells you that means something about the market's future price action, they're just blowing smoke. Yes, this rally has lasted a long time. But that's because it's had to.
Remember, the 2008 financial crisis was the biggest market catastrophe since the Great Depression. It was so bad that people thought asset prices may fall to zero (No joke). While things never reached that point, once it was all said and done, stocks still lost about 50% of their value from the market's peak in 2007 to its low in 2009.
That means when the rally started back in March 2009, most stocks had to double just to get back to their 2007 levels. So yes, our current rally has been extreme. But that's what it took for things to return to normal.
And things are, in fact, returning to normal...
Whether you've realized it or not, the economy is healing. Not only is U.S. GDP expected to grow 3.1% in 2014 (the historical average is 3.2%), unemployment has quietly fallen to 6.7% -- within a few percentage points of the Federal Reserve's target rate of 6.5%.
And speaking of the Fed, I can't believe I'm saying this... but they've actually done a decent job managing the "taper tantrum." Since former chairman Ben Bernanke started tapering his record bond buying program late last year, they've stuck to his plan -- bringing total monthly asset purchases down from $85 billion in early December to $55 billion today.
And guess what, the market hasn't crashed. The SP 500 is actually up 2.2% since the taper started. I hesitate to say it... but maybe... just maybe... stocks are actually getting strong enough to stand on their own.
Don't get me wrong. I'm not saying navigating this environment going forward will be as easy as it has been over the last five years. With most major market sectors now trading back above their 2007 highs, it's getting harder and harder to find solid, undervalued growth stories in today's market.
Here's a chart showing you what I mean...
The table above shows the average annual return for each sector since the financial crisis began.
The first thing you'll notice is that financial service stocks and utilities are the only sectors posting negative annual returns since 2007 (meaning they're the only industry groups yet to fully recover from the 2008 financial crisis).
That makes sense. Utilities are generally seen as defensive investments. They tend to underperform when the market is in rally mode.
Financial services, on the other hand, was the most oversold sector during the 2008 financial crisis -- with the industry as a whole falling about 77% during that time. It's only natural this group would take a little longer to recover.
The second item you should see in the chart -- and arguably the more important factor of the two -- is that even the best performing industry, consumer discretionary, has only averaged 9.5% annual returns since 2007.
Remember, the long-term average for U.S. equity growth is around 7%. Given that right now the best performing industry is only beating that number by a few percentage points, from a long-term perspective this bull market doesn't look nearly as impressive.
Of course, we're not implying that stocks are going to continue their stellar rally. We're only saying that up until this point, the bull market we've been experiencing has been about the recovery more than it has been about speculative risk taking.
Unfortunately, with things finally getting back to normal, investors can't just throw darts at a newspaper and expect to make money anymore. While we remain bullish on stocks in general, we recognize that the recent price action means people are going to have to get back into the habit of selectively picking the best companies operating in the most promising industries.
Bottom line, it's clear that investors are going to have to be a lot pickier when it comes to making investment decisions going forward. Ignore the chatter about the bull market getting long in the tooth, so to speak. There's always a bull market somewhere.
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