Anatomy of Bears and Bulls

October 29, 2013
Share

Bull markets are all unique in their own way. In the late 1990’s, companies didn’t necessarily need to earn money or have actual plants and equipment. They needed to have a webpage and rapidly growing sales. It was truly a bull market made of dreams. When it ended, those stocks that rose fastest crashed the hardest.

The boom that took hold after the tech bubble burst was the polar opposite. It was led by highly capital intensive businesses like oil and gas drillers, miners, homebuilders, engineering firms and others. No one wanted technology companies any more, as the pain from the last bust still lingered.

So far, through this current bull market, the consumer has led the way by far. While the broad S&P 500 is up about 160% from the low on 3/09/2009 through 10/25/2013, the S&P 500 Consumer Discretionary sector is up almost 300%. This is surprising. Aside from the sheer magnitude of the advance, remember back to the mindset of investors near the bottom.

Seemingly everyone “knew” that the consumer was over-leveraged with debt and had no savings. Housing prices were still on the decline, wages had stagnated and the unemployment numbers were ghastly. It made absolutely no sense, whatsoever, that the consumer stocks would be the ones to lead the next bull market. But they did. The “last best” sectors (e.g., energy and materials) have been among the weakest performers in the current bull market.

Bear markets all have their own make up as well. Some are like a slow bleed, and some are aggressive and swift. Most simply clear out the excesses that built up during the last boom. Both the technology and telecom busts of 2000, as well as the housing/financial busts of 2008 were corrections of the prior excesses. Because those excesses made their way into just about every other sector of the economy in one way or another, they brought the rest down with them.

Are there huge excesses today? Maybe, but they don’t seem to be excesses that are indicative of a market top. During the tech boom, people wanted to buy the next hot internet IPO regardless of price or earnings. Today, most IPO companies have earnings. During the housing boom, zero-down financing created lines around the block for tours of new developments. We don’t see that today. We will probably see Black Friday shopper tramplings and the like in a month or so, but, unfortunately, that mania happens every year. Where are the excesses? Monetary policy? Government? Information? We don’t know, but we do use history as a guide to remind ourselves that excesses are usually what lead to bear markets. And after that bear market, the new leaders usually come from where you least expect them.

Blog Disclosure
Examples are hypothetical in nature and are for illustrative purposes only. HFG Wealth Management, LLC (“HFG”) is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The views expressed by the author are the author’s alone and do not necessarily represent the views of HFG or its affiliates. The information contained in any third-party resource cited herein, including but not limited to other blogs, websites or articles, is not owned or controlled by HFG, and HFG does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by HFG of third party or any of its content or use of its content. The standard information provided in this article is for general educational purposes only and should not be construed as, or used as a substitute for, financial, investment, or other professional advice. If you have questions regarding your financial situation you should consult your financial planner, investment advisor, attorney or other professional. A copy of HFG’s current ADV Part 2A discussing HFG’s investment advisory and financial planning services and fees is available for review upon request or at www.adviserinfo.sec.gov.


Share

INVESTMENT
ADVICE

Asset Allocation
Investment Review Selection
Portfolio Management
Risk Analysis Management
Tax Impact Analysis
Asset Transition Analysis

Copyright © 2017. HFG Wealth Management, LLC. Investment advisory services offered through HFG Wealth Management, LLC – An independent Registered Investment Advisory firm registered with the SEC. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Therefore, any information presented here should only be relied upon when coordinated with individual professional advice. [ more disclosures ]