Bull Market Turns 10 — What the Past 10 Years Taught Us, We Already Knew

April 30, 2019

The stock market bottomed in March 2009 after a prolonged and deep decline from its October 2007 highs. The financial crisis wounds were deep. The global banking system was nearly torn to shreds, forcing unprecedented monetary and regulatory actions. Debt markets were frozen. A new administration had entered the White House. Stock market investors were scarred by yet another decline of over 50%, having experienced a similar decline during the tech bubble. As the first wave of baby boomers crested into retirement, many were left to wonder if their depleted savings would require a change of plans.

The debt markets began to unfreeze in April 2009, starting with two large issuances that would not have been possible a month earlier. Simon Property Group, the world’s largest real estate investment trust (REIT), came to market with a 10.35% coupon debt offering. Around the same time, the State of Michigan issued general obligation bonds under the newly minted “Build America Bonds” program sponsored by the federal government. Bond insurance, the previously required comfort blanket for muni investors, became scarce as bond insurers faced the prospect of bankruptcy from subprime mortgage insurance claims. As bond markets began to loosen, stocks rose off the bottom, but remained volatile. In November 2009, Warren Buffett’s Berkshire Hathaway acquired Burlington Northern Santa Fe railroad in the first mega deal after the bottom. Financial markets were beginning to function normally again. Global equity markets ended the year up 41% (with a total return for the S&P 500 of 26%).

Even though company fundamentals and economic data were both showing improvements, headline risk kept investors nervous in 2010 (that’s a theme that has reemerged multiple times over the past ten years). Barely a year had passed from the bottom, and markets were asked to digest the Affordable Care Act (Obamacare). May brought the “flash crash”, with the Dow Jones Industrial Average falling nearly 1,000 points in a half hour. May also brought the Deepwater Horizon (BP) oil spill, which was among the largest disasters on record. Gold prices, which are historically considered a “fear trade”, continued to reach higher highs throughout the year. Global stocks ended the year up 11% (U.S. +15%) in 2010.

The summer of 2011 introduced the threat of another financial crisis. By this time, interest rates were still declining, housing prices had yet to bottom, and the price of gold continued to rise. The Fed terminated its quantitative easing program (QE2) without replacing it. Shortly thereafter, the government did not lift the debt ceiling, causing Standard and Poor’s to downgrade the credit rating for the United States. During this time, international markets were unsettled as well. The Greek debt crisis had peaked, casting widespread fears that they would be the first in a series of European countries to default on their debt obligations. Many thought a Greek default could crumble the European Union (EU). Global stocks declined 14% (U.S. +2%) in 2011.

As markets moved into 2012 (global +17%; U.S. +16%) and 2013 (global +15%; U.S. +32%) investors grew fatigued from geopolitical worries and shifted their attention to improving company fundamentals. In 2014, anemic global GDP growth continued, and global commodity prices collapsed, particularly oil prices. 2015 brought softer economic data domestically, and a currency devaluation and economic concerns over a slowdown in China. In 2016, those China concerns escalated further, along with election discourse in the United States. 2017, 2018, and the beginning of 2019 have brought a new tax regime, escalated political tensions, a market correction of 20%, a Great Britain who can’t seem to figure out how to “Brexit,” a debt and humanitarian crisis in Puerto Rico (a U.S. territory), and at least temporary relief from Fed monetary tightening.

As we reflect on what this bull market has endured, it’s important to think about the role of investor psychology. Consider how easy it was for investor emotion to cause poor portfolio decisions at various points throughout this cycle. Market advances have been met with skepticism while market corrections have been met with elevated fear. We have not yet seen the euphoric behavior that has accompanied previous market bubbles. The past decade is the perfect example of why having a strategic asset allocation, anchored by a financial plan designed to meet your unique goals, is critical. Having the appropriate goals, along with a strategic asset allocation designed to meet those goals, provides the structure and guardrails needed to ignore short-term headlines (noise) and focus on the long-term.

As we’ve seen over the past 10 years, markets are continuously fighting against the proverbial “wall of worry.” The world of exaggerated news headlines and soundbites amid heightened competition for clicks has been fully embraced by the financial media.

While it can be difficult to remain committed to a long-term plan in today’s world, it’s a necessity for meeting your financial goals. We advise clients to have a strategic asset allocation that incorporates both their ability and willingness to accept risk. The understanding of your ability to accept risk can help improve your willingness to accept risk – truly synchronizing your psyche, your goals, and your portfolio.

As of this writing, the S&P 500 is near all-time highs; it has risen by over 400% since the March 2009 bottom. Few would’ve predicted that outcome. It hasn’t always been an easy road over that time span, particularly following the investor fragility created by the global financial crisis. Those who managed to stick with a long-term plan throughout this unloved bull market have been amply rewarded.