Anatomy of Bears and Bulls

October 29, 2013

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.

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