A recent story in The Wall Street Journal headlined U.S. Stocks Poised to Enter Longest-Ever Bull Market compares the gains in past bull markets to the current one, now regarded as the longest in history (see notes at end of post).
To paraphrase Tolstoy, all happy families, and all bull markets, are alike—i.e., that when stocks go up, so does market sentiment. But the flip side—in the market’s case, volatility—goes its own way. The risk profile for the Russell 1000, according to Axioma’s short-horizon fundamental model, has looked very different from one bull market to the next.
The tech boom that fueled the market until 2000 saw much higher levels of risk—higher than it had been and higher than in other bull markets—in the waning days of the bull market. Similarly, the crash that ended the boom from August 1982 to August 1987 was preceded by a doubling of the level of risk over the 18 months through June 1987, although it dropped quite a bit right before the actual peak. Intuitively, one would expect risk to rise ahead of a market peak, as breadth typically narrows (so the return is driven by fewer and fewer stocks), valuations rise and cash flows in from less-informed investors, driving that last hurrah for stocks. But that has not always been the case.
While risk is likely to be elevated at the very beginning of a bull market (because, of course, the bear market that likely brought elevated volatility just ended), it is a little more surprising to see what happened in bull markets such as the one from the end of 1987 through 1990 and the current one. In both cases, the run started with market volatility of around 40%, which then fell to just 10%. In the 1987-1990 bull market, risk stayed between 10% and 15% for the last 2½ years of the run. In this current environment, we have seen more fluctuations since the end of the bear market in March 2009, most notably during the Taper Tantrum, but risk has generally trended down (and reached a 35-year low in November 2017). To be sure we saw an increase in risk of about 10 percentage points—a doubling of the level—early this year when the market stumbled, but volatility has once again fallen, and has been well below the level of the last few months of any of the last four bull markets.
With only four bull markets since the inception of our US risk models prior to this one, it is difficult (or foolhardy) to draw any firm conclusions based on what we have observed. We have been watching for a large and sudden increase in volatility that might herald the end of the current run, but were head-faked in February. It would be nice if markets turns could be as clear as coasting on a highway, where danger signs are posted ahead of dangerous curves requesting that drivers slow down. Unfortunately, today’s volatility readings seem to condone speeding as if nothing but a straight Route 66 was ahead of them. Although the geopolitical landscape could easily lead to a skid, or an accident, most drivers seem to still be focused on staying the course for now.
So the vigil continues…
Bull market length is since at least 1982. In addition, there is a bit of disagreement about whether the bull market that started 1987 ended in 1990 (the WSJ’s take) or went straight through to 2000. In the latter case, we still have 800 more days to go before crowning a new longevity leader! For this brief analysis, we will stick with the WSJ’s definitions, however.
The WSJ cited 3,453 days since the start of the current bull market, but we assume they are counting calendar days. By our calculation, there have been 2,382 business days since March 9, 2009.