We all knew this day would come, so let’s bow our heads in reverence to what will be remembered as the longest bull-market run in history.
Yesterday, on March 11, 2020, the iconic Dow Jones Industrial Average (DJINDICES:^DJI) closed down by 1,465 points, or nearly 5.9%. More importantly, it breached the important psychological level of closing down more than 20% from its all-time closing high. That’s right, folks, the 123-year-old Dow Jones is officially in a bear market.
The United States’ other important stock indexes, the Nasdaq Composite (NASDAQINDEX:^COMP) and S&P 500 (SNPINDEX:^SPX), are also knocking on the door of a bear market. Both indexes are lower by 19% from their all-time closing highs, which were set just 16 trading sessions ago. And if Wall Street forecasts prove accurate, it’s only a matter of time before the Nasdaq and S&P 500 join the Dow in official bear market territory.
Perhaps what’s most interesting about the end of the longest bull market run in history is what wound up doing it in: a roughly 120-nanometer virus. Despite contending with a U.S.-China trade war, the European sovereign debt crisis, Brexit, and civil wars occurring in oil-producing regions such as Iraq and Libya, it was coronavirus disease 2019 (COVID-19) that was ultimately responsible for ending the market’s monumental run. This demonstrates, once again, that we rarely know what will lead to a bear market before it happens.
Why did the recently-ended bull market last so long?
Before digging into what happens next, I think it’s important to reflect on the unique situation that allowed the bull market to continue for as long as it did.
One factor that explains such a prolonged period of bullishness is dovish monetary policy from the Federal Reserve. Between December 2008 and December 2015, the nation’s central bank kept its federal funds target rate (i.e., the rate depository institutions charge other banks and credit unions for overnight lending) at an historic low of 0% to 0.25%. Even when the Fed raised rates by 25 basis points on nine separate occasions between December 2015 and December 2018, it did so methodically and telegraphed these moves well in advance. In other words, the Fed left the barn door wide open for enterprises to borrow at attractive rates, which led to plenty of hiring, dealmaking, and innovation at the corporate level.
Another factor to consider is that President Trump signed the most comprehensive tax reform legislation in more than three decades into law in December 2017. The Tax Cuts and Jobs Act wound up modestly readjusting individual tax brackets, but ultimately slashed the peak marginal corporate tax rate for corporations to 21% from 35%. With publicly traded companies able to keep more of their operating profit, many used this extra cash to repurchase their own stock, or in rarer cases boost dividends to shareholders.
Share buybacks for S&P 500 companies hit an all-time record of $806 billion in 2018, with Goldman Sachs predicting in October that S&P 500 company buybacks would come in around $710 billion in 2019. For context, S&P 500 buybacks ranged between $400 billion and $600 billion annually between 2012 and 2017. Since buybacks reduce the number of shares outstanding for public companies, they can have a positive impact on earnings per share and make a stock look far more fundamentally attractive to investors.
Additionally, don’t overlook the impact that technology has had on the marketplace. Since the advent of the internet in the mid-1990s, it’s become increasingly easier for Main Street to participate in the greatest wealth creator on the planet. With the ability to access financial information and press releases with the tap or swipe of a finger on a smartphone, Wall Street and Main Street are working on a level playing field. This ability to disseminate and gather needed information quickly has helped keep investors focused on what matters, rather than rumors that can roil markets.
A new bull market could be here quicker than you think
While investors are no doubt sad to see one of the most impressive bull runs in history put to bed, we shouldn’t mourn for too long a period of time. That’s because history has shown that stock market corrections are a normal part of the investing cycle, and that they typically last for a considerably shorter length of time than periods of expansion.
Dating back to the beginning of 1950, there have 38 official stock market corrections in the S&P 500. By “official,” I mean declines of at least 10% from a closing high, without rounding up to the nearest whole number. Not including our current correction (since we don’t know when it’ll end or how steep the decline will be), 23 of the previous 37 corrections in the S&P 500 wound up lasting 104 or fewer calendar days. That’s only 3.5 months, for those of you keeping score at home.
What’s more, lengthy corrections have been particularly rare over the past 36 years. As noted, the rise of computers and the internet has made it easier than ever to disseminate information to Wall Street and Main Street. This has the effect of keeping the rumor mill at bay and allows investors to focus on facts. Although periods of panic do occur, as we’re witnessing at this very moment, emotional trading tends to be short-lived.
In fact, dating back 38 years, we’ve only had three instances of a correction taking longer than six months to find a bottom. It took roughly 10 months in 1983-1984, 929 calendar days during the dot-com bubble, and 517 calendar days during the Great Recession.
But what can be rightly argued here is that we don’t have a failure of any of the financial pillars that led to such events as the financial crisis. Rather, we have panic surrounding the spread of COVID-19. Correcting investors’ perspective and response to this illness will likely prove considerably easier than trying to prop up financial markets, which leads me to believe this downturn will be on the shorter side.
If you’re buying this decline, you’ll be a happy camper soon enough
Taking all of this information into account, it’s no surprise that opportunistic investors who choose to buy top stocks during times of fear tend to make out like bandits over the long run.
For instance, Visa (NYSE:V) could see consumer purchasing taper off in the short-term as Americans choose to stay indoors more often. But if we learned anything as investors during the Great Recession, it’s that little keeps a company with huge competitive advantages down. Visa holds 53% of U.S. credit card market share in the U.S., by network purchase volume, and has a huge international opportunity to move consumers from cash to plastic in underbanked regions. Best of all, Visa’s not a lender, so credit delinquencies aren’t much of a concern.
Then there’s hospital operator HCA Healthcare (NYSE:HCA). HCA has lost nearly a quarter of its value in recent weeks, but could be one of the prime beneficiaries of the COVID-19 illness. We’d prefer that our hospitals not be inundated with patients, but COVID-19 testing and care for patients who are most susceptible are going to become the norm for the foreseeable future. Not to mention, with Vermont Sen. Bernie Sanders (I-Vt.) falling further behind former Vice President Joe Biden for the Democratic Party presidential nomination, it’s looking unlikely that real healthcare reform is coming anytime soon. That’s positive news for HCA Healthcare.
For investors with a lower tolerance for risk, there’s telecom stalwart AT&T (NYSE:T). Because AT&T’s wireless members are on subscription plans, it makes it highly unlikely that the company’s churn rate will jump higher. This is especially true with AT&T rolling out its faster 5G network, and smartphones having become sort of a necessary good. AT&T can also benefit from the stay-at-home mentality associated with the spread of COVID-19 by leaning on its traditional cable and streaming assets.
There are a lot of great companies at valuations that we haven’t seen in a long time. In short, don’t mourn the end of the longest bull market in history. Be thankful you can buy in at a discount before the next bull market takes shape.