If you’ve missed stocks’ rally since 2009, have you missed your chance for long-term growth? Some say yes, arguing this bull is swiping gains from the next 10 to 30 years. But in our view, that ignores the many positives supporting stocks today, and it underestimates markets’ long-term potential. In our view, stocks’ future is much brighter than many believe.
To assume this bull market’s gains are stolen from the future assumes markets today are pricing in what will happen over the next decade or three. But this isn’t how markets work. Short-term wiggles aside, markets move on investors’ expectations for the foreseeable future—12-18 months out. Anything further in the future is too unknowable. Stocks are incapable of valuing matters decades from now.
This isn’t just theoretical. Market movement comes from millions of people’s trading decisions—all based on their own beliefs, opinions, knowledge and expectations. With perhaps a few exceptions[i], those are based on what they know at any time. Consider the swingin’ 60s bull: by the “stocks are stealing” logic, stocks then might have priced in the tech boom. But how could markets discount the Internet when computers were bigger than your fridge, PCs weren’t even science fiction and calling long distance was a pricey hassle? What about the 1974-1980 bull market? If you believe stocks are stealing from the far future today, you’d have to accept stocks priced in the shale boom back then. At a time when people panicked over falling oil supply due to the Mideast embargo and most assumed US oil production was entering perma-decline? Rule 1: If stocks can’t see it, they can’t price it.
There is another fallacy at the heart of the dismal decade warnings: The notion markets are allotted a fixed amount of returns over time, and stocks are burning through ‘em early. But markets don’t have a ceiling—they rise higher over time with economic growth and the earnings of publicly traded firms. Potential gains are as limitless as the future itself. Nor do strong gains in one bull prevent another raging bull (or another or … ). Did the 80s bull—where the S&P 500 Price Level Index returned 229%—prevent the 90s from enjoying the biggest bull since 1931?[ii] Sure, the decade afterward the bull wasn’t phenomenal, but not because the law of averages mandated it. Rather, because that decade was bookended by two of history’s biggest bear markets—only one of which was a natural phenomenon.
Market cycles will always be with us—bulls and bears. We’ve seen a dozen of each since 1929 (this is bull #13). Investors typically get too giddy, overextend themselves, bid stocks too high and eventually pay the piper. Then the cycle turns and a new bull begins. Most of the time, bulls are bigger than bears—why stocks rise over time. The extremes of bulls and bears average out to long-term growth. All that we’ve seen in this cycle is a big bull that followed a big bear—that few expected a giant bull doesn’t make it unbelievably abnormal.
There is no reason to expect cycles to cease. Stocks’ long-term potential is as vast as technology’s unimaginable future wonders. What will they look like? Who knows! We, like markets, can’t imagine specifics. But we do know the building blocks—microprocessors, energy efficiency, computer memory, telecommunications and so much more—are getting better every day. With each small gain, there is potential for creative folks to dream up new products, companies and entire industries. That’s the story of our economy since the Industrial Revolution. It’s why the many gains of the 20th century happened. Yes, bear markets happened, too, but that’s normal. We’ll see more. But with technology not slowing down and the profit motive intact, there is no rational reason to think markets can’t continue rising over the very long term.
[i] Those exceptions being the irrational fears folks deal with near-constantly. Those are the source of short-term inefficiencies.
[ii] FactSet, as of 12/2/2013. S&P 500 Price Level Returns, 08/12/1982-08/25/1987.