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Graph of the week

Graph of the week

21-06-2018 | Insight

The biggest bull!

  • Jeroen Blokland
    Portfolio Manager

This week’s graph is from Visual Capitalist, a digital media brand that uses visualization to make investment themes more digestible, and shows the longest bull markets since the end of WWII. As we can see, the current bull run is on the cusp of becoming the longest of that period. But will it happen?

Duration and return

The answer is likely to be “yes”, since we are only two months from reaching that milestone. At present, the longest bull market since WWII is the one between 1990 and 2000, which lasted for total of 114 months (almost 10 years). But being the longest rally doesn’t necessarily make it the most rewarding one. Despite a pretty stellar performance, the current bull run is only fourth out the six biggest post-WWII bull markets in terms of annualized return.

Just two more months

While a lot can happen in two months, the odds are in favor of the record being broken. In general, major bear markets precede recessions. But the next recession is not likely to occur for another year or two. Global GDP growth is solid and actually increasing in the US, the world’s largest economy. And interest rates remain very low, enabling even the most debt-burdened companies and countries to pay off their debt. Central banks are slowly starting to reduce liquidity, which remains abundant for the meantime. Historically, these circumstances have led to higher equity prices.

What if?

So, what could go wrong? The economy is unlikely to stall in the coming two months, so it would take a severe downturn in investor sentiment to end the rally. A steep escalation in the US-China trade war that sucks in countries like Germany and Japan could trigger such a market-wide decline. Especially if things get so nasty that global growth takes a serious beating. This would be bad news for many emerging countries that are heavily dependent on exports, but also for highly indebted companies and countries like Italy. They will no longer be able to ‘grow’ their way out their massive debt piles. This could then lead to higher interest rates, especially given the measures of central banks to reduce stimulatory measures, and further impact growth. The markets will tumble if investors start to anticipate this negative feedback loop, bringing an end to the current bull market.

As we can see, there are quite a few “ifs” in the downturn scenario described above. But while there is little chance of it actually happening at this point in time, it isn’t totally inconceivable either.

Source: http://www.visualcapitalist.com/visualizing-longest-bull-markets-modern-era/

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