Stock bull market longest on record, 4 main reasons for longevity

Reuters / John Gress

• The equity bull market is now the longest on record, at
  3,453 days.
• The benchmark S&P 500 has surged a whopping 323%
  over the period.
• As traders celebrate the feat, they have four main
  drivers to thank: earnings growth, share buybacks, extended
  monetary accommodation, and a buy-the-dip mentality.

Do you remember what were you doing on March 9, 2009?

If you were buying the S&P 500, you had impeccable
timing.

That’s because the equity bull market — which began on
that date — is now the longest on record, with an ongoing
duration of 3,453 days, according to S&P Dow Jones indices data.

Business
Insider / Joe Ciolli, data from S&P Dow Jones
Indices

For context, a bull market is defined as a 20% rally on a closing
basis that’s at no point derailed by a subsequent 20% decline.
March 9, 2009 has long been the agreed-upon starting point for
such calculations, since that was the absolute bottom for the
prior bear market, which ended that day.

The S&P 500 has surged a whopping 323% over the period, with
its roughly 19% annualized return slightly lagging the historical
bull market average of 22%.

Markets
Insider

It also must be noted, however, that not everyone necessarily
agrees with the methodology used by S&P Dow Jones. Research
outfit Bespoke has been adamant that
that the bull market ended on January 26, 2018 — the last time
the S&P 500 closed at a record high — since, for all we know,
we’re in the middle of a bear-market descent.

But to the majority of experts — including S&P Dow Jones
and Bank of America Merrill Lynch — it’s best calculated as the
number of days from the previous bear market low, all the way
through the subsequent 20% increase and 20% decline. By that
measure, we’re still firmly in a bull market, especially with the
S&P 500 hovering so close to yet another record high.

Read more: The legendary investor who
predicted the past 2 bubbles breaks down how the 9-year bull
market will end

In the end, when historians go back and assess the unprecedented
length of the current bull market, they’ll likely keep coming
back to the same four drivers: earnings growth, share
buybacks, extended monetary
accommodation, and a buy-the-dip mentality.

We dive into each one below, and explain their significance to
the record-breaking bull run.

(1) Earnings growth

The engine of the stock market. The backbone of the bull run. The
end-all to be-all of equity performance as we know it.

All of the above have been used to describe earnings growth on this site —
and that might not even be doing it justice. Put simply, profit
expansion is the biggest and most important driver of stock
returns.

Sure, you can make due when earnings growth is receding — as the
S&P 500 did over a five-quarter period from 2015 to mid-2016
— but it’s going to be difficult. If you’re trying to set a
record for longevity, it’s the most important building block to
have.

And the 9-1/2-year bull market has seen no shortage of profit
expansion. It’s grown in 30 out of 35 quarters, and is currently
enjoying its strongest stretch since 2010.

Beyond the straightforward fact that earnings growth is
inextricably linked to stock-price accretion — given what it
means for a company’s future prospects — it can also play into
traditional readings of valuation.

The ratio of price-to-earnings (P/E) has long been the most
popular reading for valuation, and when profits are growing, the
denominator in that equation is rising. That can either shrink
P/E, or at the very least keep it in check. And that, in turn,
emboldens traders to buy more.

(2) Buybacks

Over time, buybacks have proven to be a tried
and true way to boost stock prices for shareholders without them
lifting a finger, because they shrink the pool of outstanding
shares.

In addition, repurchases can be an invaluable safety net for
stock prices — capable of engineering gains during periods devoid
of other positive catalysts. When S&P 500 corporate-profit
growth shrunk for five straight quarters from 2015 through
mid-2016 (as mentioned above), buybacks were there to pick up the
slack.

Of course, buybacks are only possible when companies have
adequate cash. And wouldn’t you know it — the 9-1/2-year bull run
has coincided with some of the easiest lending conditions in
history.

Not to mention the GOP tax law, which totaled $1.5 trillion
in cuts and brought overseas cash flooding back into the US.
While it may not be what many had envisioned for tax reform,
there’s no denying it’s been a major boon for buyback activity.
As the chart below shows, Goldman Sachs expects
authorizations to reach an all-time high in 2018.

Goldman Sachs

(3) Extended monetary accommodation

It’s not a coincidence that the stock-market recovery since the
bottom reached in March 2009 has run parallel to a period of
unprecedented monetary accommodation — all courtesy of the
Federal Reserve.

By keeping lending costs so low, for so long, the Fed has given
companies ample leeway to make acquisitions, reinvest in capital
expenditures, and sink money into research and development. You
know, the types of activities that keep businesses growing,
earnings expanding, and share prices rising.

Critics commonly refer to this dynamic as the “Fed put,” which
they argue has emboldened investors and created a mentality that
the central bank won’t let the market fail again.

With that said, the Fed has started to tighten monetary
conditions in recent quarters, which means the spigot could soon
be closed. However, the central bank hasn’t been as hawkish with
its policy as many expected, which could have traders unwinding a
worst-case scenario for rate hikes they no longer see unfolding.

(4) Buy-the-dip mentality

This last driver deals more with investor psychology than any
sort of internal market dynamic. But it’s no less important.

Throughout the 9-1/2-year bull market, investors who scooped up
discounted shares after major sell-offs were rewarded time and
time again. Initially, their confidence was perhaps boosted by
the aforementioned strong earnings growth, or the other
fundamental catalysts listed above.

But after a while, the buy-the-dip strategy became embedded as a
market driver all of its own. People simply got used to the
market rebounding from brief meltdowns, then ending up stronger
than ever. Strategists began citing it as a legitimate source of
buying power.

Of course, it takes an ever-present undercurrent of bullishness
to keep dip-buying in play, which is where the three drivers
outlined above come in.

In the end, all four pillars of the bull market presented here
have combined to create the record-breaking situation we’re
seeing today. Enjoy it while it lasts.

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