The Bull Never Left
The market crash of March 2020 was not brought on by weakness in the financial system or the global economy
60-Second Summary
The market crash of March 2020 was not brought on by weakness in the financial system or the global economy. If you remove those few months from the graph, it is evident that the bull run that began in 2009 is still in effect. And guess what? Pre-COVID that bull market was approaching its top.
Tell Me More
The financial crash of 2008 brought the world economy and financial systems to their knees. The Nasdaq 100 more than halved in value and many companies went belly up. Since March 2009 markets have been on a tear, e.g. the Nasdaq 100 has nearly doubled in value, and many of its constituents have increased several hundred percent in terms of market cap.
That bull run has set several records, including being the longest on record. But as stock values continued to rise, the growth of corporate earnings (the profit they make) began to slow down. These facts amongst others hinted that the bull run was coming to an end e.g.
Record lows in unemployment (at least in the first world) - businesses have heavier workforces in the good times
A concentration of funds in certain assets - people feel they can’t lose by betting on historic winners
Massive amounts of debt. Debt in itself is not a bad thing, but as any bull market rolls on the total amount of outstanding debt increases. And it has to be repaid at some point (or forgiven).
Stocks overvalued by most measures
A sustained uptick in volatility
Time. A good thing can only go on for so long, and ten years is a long (the longest ever!) time for a bull run.
None of the above should be surprising. It’s old news. But before the bull market could reach its natural end, the rug was pulled out from under it. Investors have been ploughing back into the markets with gusto, at least in part because “the bear market” that is needed to balance the 10-year bull run arrived.
But it hasn’t really. The bull-bear cycle is part-and-parcel of the debt cycle. The bull market creates debt, using this debt to fuel growth. The longer the party goes on, the more debt is created. But at some point the party is over, debts are called in, and the world tightens its belt. Businesses that are too inefficient to run without low-cost debt fail. Jobs are lost. Everyone becomes more fiscally conservative, and slowly but surely, the amount of debt globally shrinks until the world is ready to start partying once again.
It’s pretty clear that the bear cycle has not played out. On top of this world governments have created a record amount of debt to jump-start economies after the Great Lockdown. As a result, we’ve seen a boom in indices since March, which is detached from the economy. So the question for investors is, what’s next?
How Can I Make Money From This?
The past few days have seen a market correction, and I’m sure the considerable number of new retail investors are worried. If they read my conclusion above they might be terrified. But I don’t think it’s all bad news.
For specific sectors, earnings (profit) growth is once again increasing. For those sectors that have been hardest hit, they will return to growth from their current standstill. Belts have tightened even as debt has skyrocketed. And so we find that we’ve reversed the bull market a little extending the run at least a couple more years. Probably.
So how can I make money from this? A bull market requires a bull strategy, and tells me not to be scared out of positions when the inevitable consolidations happen. And I will be sure to keep some cash on hand to snap up cheap businesses because it’s going to be a volatile ride!
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