Longest Bull Market In U.S. Stocks Bid Adieu But Not Before Flashing Warning Signs

The longest bull market in U.S. stock market history abruptly came to an end last month. Between March 9, 2009 and February 19, 2020 – that is, 131 months – the S&P 500 large cap index rallied 401 percent, second only to the 417-percent jump in the October 1990-March 2000 bull.

In the current bear market, the S&P 500 already lost nearly 33 percent intraday and just under 30 percent on a closing basis. The speed with which this has occurred has surprised many. Were there warning signs? Turns out there were plenty, and they were getting more and more extended as time progressed.

In finance, Tobin’s Q is a popular investment concept. Propounded by economist James Tobin, it compares an asset’s market value to its replacement cost. For our purposes here, a proxy of Tobin’s Q can be generated by dividing companies’ market value by their net worth (Chart 1).

In 4Q19, the market cap of U.S. non-financial companies was $33.9 trillion against $16.9 trillion in net worth. The resulting ratio of 2.01 was slightly less than the 2.04 reading recorded in 3Q18. These readings were a hair’s breadth away from the all-time high of 2.14 from 1Q00. The bear market that followed back then lasted 31 months, for a decline of 49 percent.

Another similar metric is the price-to-sales ratio. Unlike earnings, particularly non-GAAP, sales are less susceptible to manipulation.

In Chart 2, four quarters of sales of S&P 500 companies are divided into the index. In 4Q19, 12-month sales totaled $1,415.20/share, even as the index closed at 3230.78. The resulting ratio of 2.3 was the highest ever – higher than the 2000 dot-com bubble high and much higher than the 2Q07 housing bubble high. We know how stocks fared in the aftermath of those highs in both those occasions. The rubber band could only be stretched so far before it snapped. Fast forward to today, and this is precisely how things unfolded.

Speaking of a grossly extended metric, Chart 3 highlights the unsustainable way U.S. household wealth was growing.

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