Iconic investor John Templeton once famously said, "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." This nugget of wisdom continues to be measure for which market cycles are evaluated by many investors, including me.
Which begs the question, where are we now? Well, to me this current bull market cycle which began on March of 2009, has thus far followed this Sir Templeton’s observation to a T.
With the benefit of hindsight, and some charts, when I look back, and think back, to the market behavior we’ve experienced since that time the picture emerges.
Now first, let me get it out there, I’m no technical analyst. As someone primarily focused on economic and financial fundamentals, I find it difficult to formulate investment strategy off a chart, but I do also think charts can be incredibly useful for studying past trends and setting expectations based on these observations. Keeping in mind as always, that past performance does not indicate future results.
When I look back at the current market cycle using a chart, and apply my memory from both investing during this period and more importantly, working with clients through this period, I believe the “pessimism” part of the cycle started on March 9, 2009 and ended in January 2010.
The brave early investors in the then “baby” bull market, who were able to deploy capital courageously after the financial crisis were treated to gains associated with a stock market that appreciated roughly 70 percent in just 10 months from the March 9 low. For those investors that held tight through the crisis, this initial recovery period had stock market levels approaching pre-crisis levels, but still well below the previous bull market highs that occurred in October 2007.
After this initial recovery the market took a breather, experienced a healthy correction, and I believe entered the “skepticism” phase in August 2010. This second leg didn’t move up quite as fast the first phase, but ultimately provided more gains and lasted longer until what I perceive as November 2014. For those who held through the crisis, the previous bull market high levels were reached again in April 2013.
Then after a roughly two-year sideways breather, to me the market clearly entered the "optimism" stage in November of 2016. This third stage has allowed many investors to build household net worth nicely beyond what they had at the top of the previous bull market. For many, the stock market is once again being viewed as a tool of wealth creation, and not simply a dangerous Wall Street game. While gains have been more predictable during the "optimism" phase, the level of gains has moderated from the pessimism and skepticism phase as investors are enjoying the pursuit again. A comfortable confidence seems to have set in.
Now we get into the tough part however. It's relatively straightforward to look back and identify prior patterns, but when we attempt to look forward things get complicated. My intuition tells me we are approaching the end of the "optimism" cycle. Next week we’ll talk about how the transition into the “euphoria” may look this time around.