Anyone that has checked their retirement accounts since Donald Trump’s presidential victory already knows that the market is on a historic tear. What few know however is that this bull market we’re currently in is now officially the longest running bull market in American history. Note that when I’m speaking about the U.S. stock market, I’m referring to the S&P 500 index, not the Dow Jones or NASDAQ.
According to Quartz:
At the close of trading in New York Wednesday (August 22nd), the stock market will make an impressive milestone. It will set the record for the longest bull market in history. A bull market generally begins when the market rises 20% from the low set at the end of a bear market, which itself is measured by a 20% fall from a previous peak. The last low set by the benchmark S&P 500 index was on March 9, 2009. It’s been 3,453 days of fairly steady growth since then, with the S&P 500 climbing by more than 320% over that period. The previous record bull run was set between Oct. 1990 and March 2000.”
The two are charted below. While the 1990-2000 boom outperformed this current steak, the 90-2000 boom was fueled mainly by the tech bubble (which ended up bursting in a spectacular fashion). This bull run is not comparable to the internet bubble, which we know from the ratio of a company’s value to their earnings. The S&P 500 traded at 45 times earnings in 2002, compared to only roughly 23 today.
Now, onto some myths.
Was it due to Trump?
The most common claim is that this current bull run has nothing to do with Donald Trump, and is rather an extension of a run that began under Obama. In other words, we’re supposed to believe that Trump was passed the baton and just ran the final 100 meters. The only element of truth in this claim is that it is true that the bull run didn’t begin under Trump.
As evidence to support their critisism, some critics (such as Paul Krugman) point to how European stock performance in 2017 mostly paralleled that of U.S. stocks.
“Sure the markets surged in 2017” the argument goes, “but it was just part of a global economics recovery.”
Below is a clearer chart, comparing the S&P 500 to a fund that tracks the EAFE (an index of developed market stocks, mostly European). The date range is January 1st 2017 to December 31st 2017, and more-or-less paints an identical picture to Krugman’s chart. It shows the EAFE rising 21%, to the S&P’s 19.3%.
A Nobel Laureate like Krugman really ought to know better when making such a claim, as he’s not accounting for how the value of the US dollar impacts foreign stock prices for domestic investors. Here’s why; for an American investor, the underlying assets in the index Krugman is citing are quoted in whatever domestic currency those companies reside in (so a British company’s stock price would be quoted in Pounds, for instance). The value of foreign stocks to an American investor therefore increase when the relative value of a dollar decreases, as their foreign stocks (quoted in that foreign currency) will be worth more in terms of US dollars.
This is relevant because the US dollar declined 10% in 2017 (12.4% against the Euro in particular) meaning that the foreign funds returns that Krugman is drawing attention to are significantly higher than they should be.
We can prove this because the same financial institution which created the EAFE fund charted above also offers a “currency hedged” version of the fund (meaning it’s not impacted by the dollar’s fluctuations at all), and that one has lagged the S&P 500 massively, rising only 12.5% over the same period.
Furthermore, U.S. stocks and international stocks have completely diverged in 2018. As a recent article in the Wall Street Journal noted, “U.S. foreign policy has driven sharp swings in European and Asian markets this summer, drawing investors into the safety of the U.S.” They prove that with an accompanying chart comparing U.S. markets to the rest of the entire world, minus the U.S.:
Hilariously Bad Predictions
You have to remember just how bad the predictions of Trump’s market critics have been. On the night of the election, stock futures declined as it became evident that Trump would win the presidency, briefly confirming the fears of the Chicken Littles among us. Krugman famously wrote that night, “it really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?… If the question is when markets will recover, a first-pass answer is never.”
Within days of Trump’s victory the market began to roar, which should’ve silenced critics, but not the brain trust over at CNN. “The big surge on November 7 snapped a nine-day losing streak for stocks that many attributed to Donald Trump’s newfound momentum” columnist Paul R. La Monica wrote on November 14th. But, he warned, “several market strategists expressed concerns that the market is underestimating the possibility of Trump rattling the markets during his time in office.” Another supposed threat to the markets? Trump’s stance on immigration. “Trump’s anti-immigration stance could also be a big problem for U.S. tech companies, which have attracted a lot of talented foreign workers due to the H1-B visa program. Will Trump seek to end that?”
He concluded “Now this isn’t to say that the market definitely is due for a crash during the Trump administration. But experts think investors may now need to take a step back and remember that there still isn’t a lot that the market knows about possible Trump policies.”
The market knows a lot now – and it certainly likes what it sees.