Unloved Bull

That was an apt description of the sentiment surrounding the early years of the secular bull market that ran between 1982 and 2000. The bears thought they’d put the last nail in its coffin after the Dow Jones Industrials posted a 170% gain in the five years between 1982 and 1987, only to collapse a thousand points in the fall of ’87 to a five-year gain of only 70% (approximately 2700 back to 1700).

The media and pundits were singing dirges and hanging black crepe all over Wall Street. I mean why would you want to own a risky stock when you could get 9% guaranteed in a 10-year US Treasury Note? The answer was to be found in the fact that the Dow was to almost septuple over the next 13 (Dow 1700 to 11,425 — April 2000) years while, at very best, that bond would pay you $1.70 in principal for every dollar invested, Plus $1.53 in interest over the next 10 years = $3.23. Meanwhile your $1.70 in stocks would be worth over $11.40 at the end of that 13-year stretch, not including a very significant flow of dividend income.  Please forgive my somewhat awkward example, but I think you get my point. Regardless, the message from the media continued to be cautionary, suggesting the next big decline was just around the corner.

This is my second rodeo

My first one, the first secular bull market that I experienced in my career, was the 1982/2000 secular bull market. It lasted 18 years and I can assure you that most of the upturn, save the very end stage (the ‘I love stocks for the long-term’ stage), was met with extreme skepticism. The old saw attributed to Mark Twain, “history doesn’t repeat itself but it rhymes,” seems to hold true in comparing these two secular bulls. Here are a few fun similarities and dissimilarities to consider:

• Huge fiscal stimulus was injected into the economy via the Reagan tax cuts and beefed up defense spending.
• At the beginning interest rates and inflation were high and would gradually trend lower during the entire period.
• “Spending during the years Reagan budgeted (FY 1982–89) averaged 21.6% GDP, roughly tied with President Obama for the highest among any recent President. Each faced a severe recession early in their administration. In addition, the public debt rose from 26% GDP in 1980 to 41% GDP by 1988. In dollar terms, the public debt rose from $712 billion in 1980 to $2.052 trillion in 1988, a roughly three-fold increase.[25]:143 The unemployment rate rose from 7% in 1980 to 11% in 1982, then declined to 5% in 1988. The inflation rate declined from 10% in 1980 to 4% in 1988.”
• Of course in both instance, then and now, Congress was unable to cut social programs or defense spending, ergo BIG STIMULATIVE DEFICITS. In the case of the Reagan Tax Cuts the expected increase in revenues was not able to offset the Congress’ propensity to spend. This continues today. 

The impact of huge deficits and the “Multiplier Effect”

“The multiplier effect refers to the disproportionate rise in final income that results from an injection of spending. In other words, capital infusion, whether it be at the governmental or corporate level, should have a snowball effect on economic activity.” In other words ,stimulus can be the gift that keeps on giving over time.

It would appear that in both cases the injection of huge deficit spending was and maybe now is a key driver of the economy.  The 1981 “Economic Recovery and Tax Act” got the ball rolling but promised spending cuts never happened nor did the huge expansion of revenues promised by the ‘Supply Siders.’ Voila! … huge deficits, so much so that Congress rescinded some of those cuts in 1982 with “Tax Equity and Fiscal Responsibility Act (TEFRA).”

A lot of those deficit dollars appear to have been fruitful and multiplied …especially those in the hands of the investor class that ended up in the stock market. That’s what happened then and it is what appears to be happening now in the wake of eight years of Obama administration deficits and two years of the Trump administration “Tax Cuts and Job Act of 2017.”

I hate to say it because I really thought the 2017 Act was not needed but it appears to be really good for stocks and that is good for me because I have assets and I own stocks. It would also appear, if you factor in some sort of “multiplier effect” to these deficits, that we should have much further to go if the 1982 bull is any guide. On the other hand if you don’t have assets, you are peddling as fast as you can just to stay even.

And the band played on

In 1982 it was the catchy tune about too-high interest rates, too-high inflation rates and very competitive, super duper CD rates. BTW, all of these negatives persisted throughout the decade coupled with renewed fears of too-high federal debt and continued deficit spending. Sound familiar? There were armies of pundits saying it could not last but it did. Now they sing a slightly different tune about too-low interest rates, too much central bank intervention, too-low inflation (disinflation) and, of course, too much deficit spending.

I see the potential rhyme this time to be a theme that higher rates and inflation are signs that one big former concern, disinflation, or worse, deflation (BTW there were times in the last ten years that these were real worries), are now safely in the rear-view mirror. The return of inflation will give corporations a tool for profits not really available to them in the past few decades, PRICING.

Meanwhile, the S&P 500 sits within less than 1% of its all-time high, up 15% on the year with all the concerns that led us to last year’s ‘Christmas Eve Massacre’ (a too hawkish Fed, economic slowdowns in Europe and China, Brexit and trade wars) having been moved to the back burner. Even a newer one on the list, slowing /possibly negative corporate earnings growth, is currently being brought down by better-than-expected 1st quarter earnings reports.

Nonetheless a new breed of soothsayers, with no perspective about what happened in the 1980's, are singing a rhyming tune today in the face of a market that continues to rise, defying their every expectation … the most disrespected, unloved and disbelieved secular bull market since the last one.

What’s your take?

P.S. The one thing I learned in my first rodeo is that you need to hang on tight, lest you get bucked off!