The historic stock bull market that grew out of the ashes of the worst financial crisis since the Great Depression officially turns five years old this weekend.
While sophisticated investors continue to count their gains from the second best bull run in the post-war period, many battle-scarred retail investors feel left out of the party.
Ironically, the lack of retail participation during much the '09-'14 run may have helped keep it alive, preventing valuations from getting out of whack with mediocre fundamentals.
“Bull markets come to an end when everybody has bought in. People tend to sell at the same time, but they buy in at staggered times,” said Sam Stovall, chief investment strategist at S&P Capital IQ.
Since bottoming out at 6547 on March 9, 2009, the Dow Industrials have ripped off nearly 10,000 points as the collapse of the financial system was averted and economic growth eventually returned.
A bull market is typically defined as an advance of 20% after a decline of 20% or more that lasts a minimum of six months. Through Thursday’s close, the S&P 500 has surged 181% since bottoming at the scary level of 666 in March 2009.
Strong Market, Mediocre Economy
According to Capital IQ, of the six bull markets since World War II that lived to celebrate their fifth birthday, the current run is second only to the incredible 225% advance that began in 1982. The next closest bull market performance through five years was the 111% rally for the streak that began in 1949.
Impressively, the current market also took just five years to get back to breakeven, compared with the 25 years before stocks recovered from the Great Crash of ’29.
"The big story about the five-year anniversary is all of the investors who haven’t participated because they were scarred by 2008."
- Kristina Hooper of Allianz
The tremendous advance on Wall Street has been fueled by the return of economic growth, albeit at a slower pace than desirable, and incredibly easy money policies from the Federal Reserve.
“This whole cycle has been notable for its anemic fundamental gains, but sharp price rebound,” said Bruce McCain, who helps oversee more than $20 billion as chief investment strategist at KeyCorp’s (KEY) Key Private Bank.
Job growth has returned, though not as strong as hoped for. Profits have surged, but a large chunk is attributed to cost cutting. U.S. companies are struggling to grow revenues organically and remain reluctant to reinvest profits in job-creating projects.
Shattered Confidence Hurts Participation
Despite the duration of the bull market, it’s clear the battle scars of 2007-2009 have not healed.
“It was brutally painful. On a purely gut level, it was terrifying,” said Peter Kenny, co-chairman and CEO of financial technology firm The Clearpool Group who correctly called the market bottom in March 2009.
Kristina Hooper, U.S. investment strategist at Allianz Global Investors, said: “We had seen institutions crumble. There was this incredible tension in the marketplace and a lack of confidence that investors hadn’t seen in decades.”
“Much of that mood has persisted for years. The big story about the five-year anniversary is all of the investors who haven’t participated because they were scarred by 2008,” she said.
Just two months ago, Wall Street was buzzing about how 2014 looked like a repeat of 1929. Those fears and subsequent pullback (5% or more decline) were driven by concerns about emerging markets like China and Argentina, but they were underpinned by the memories of 2008.
Panicked investors yanked $6.4 billion from emerging-market stock funds in a single week, the most in almost three years.
“Whenever there are tremors in the market there have been significant flows out of them as well,” said Hooper.
No Melt Up...Yet
Those investors who were understandably spooked ended up missing out on a rebound on Wall Street that carried stocks to fresh all-time highs just weeks later.
“Investors aren’t willing to move in and stay in. Treat this as a permanent allocation or you will miss out on some of the best moves in the market. You have to be in it all the time,” said Hooper.
Of course, if retail investors had gone all in, the current bull market likely would have died already.
That’s because valuations would have gotten ahead of the so-so fundamentals, causing a melt up followed by a meltdown.
“There is this sense that we’ve all learned a lesson we don’t ever want to forget. It is precisely because of that sense of caution that the market has continued to find room to move higher,” said Kenny.
Sixth Birthday Ahead?
The question is whether it’s too late for investors to jump back into equities five years into the bull run.
Stovall said that while 85% of the bull markets that celebrated their fourth birthdays went on to see their fifth, only 60% of those that lasted five years celebrated their sixth birthday.
“The sixth birthday becomes a little bit more challenging. Everybody has to meet their maker one of these days,” he said.
Still, Stovall said he believes equities have a “good chance” of extending their run another year, but warns the price gain will likely be more “subdued” than the average surge of 26% in all sixth years since World War II.
For another year of green, he said the U.S. economy must accelerate to 3% by the end of 2014, earnings growth needs to stay on track and valuations need to stay within historic norms.
“At the end of the day, I do think retail investors will come back, but they will never forget what happened to them, their future and their hard earned money in that market rout that ended five years ago,” said Kenny.