Fisher Investments Editorial Staff
Market Cycles

The Tortoise and the Hare

By, 08/24/2009

Story Highlights:

  • Stocks rose over 50% since the March 9th market low, causing some to say it's "too far, too fast."
  • The initial stages of bull markets are usually exceptionally strong and don't often fizzle after a short time. Bull markets generally go on for years.
  • A look at both current fundamentals and history shows stocks can continue climbing.
  • It's essential to capture the initial stages of a new bull market to achieve long-term stock market returns.


Everyone knows the old story about the tortoise and the hare. In a race, the hare sprints off to an early lead, only to be caught napping and lose to the slow-but-steady tortoise. Many liken recent market activity to this children's fable. The market has come "too far, too fast" some say, suggesting stock prices can't keep up the recent pace. 

It's true the stock market's rise since the March 9th low has been meteoric. After Friday's 1.9% gain, the S&P 500 is up over 50% since early March. The MSCI World Index is up nearly 60% over the same period. As we've said before, the initial thrust of a bull market is exceptionally strong, so it's not surprising recent gains have been outsized as stocks recover from the ferocious bear. But doesn't the climb's breakneck pace so far mean naptime or even a renewed downturn is around the corner? No. In fact, that common conceit is the very thing preventing many investors from achieving even market-like returns over the long run.  

The table below shows S&P 500 returns (including reinvested dividends) in the first six months, second six months, and first full year of new bull markets. Looking at the 12 US bull markets preceding this one, the second six months have never produced negative returns, even if gains during the first six months were huge. On average, stocks returned over 17% in the second six months of new bulls. And bull markets with the strongest initial returns have sometimes had the strongest returns in the following six months as well. 

S&P 500 Total Return Following Bear Market Bottoms 

Stocks today still have to rise over 50% to get back to their October 2007 high and over 20% just to get back to levels preceding last year's financial panic. The panic was fueled by fears of financial system collapse, which even the most outspoken bears concede is likely off the table today. So a quick move back to pre-panic stock prices (or higher) isn't a wild notion. Fundamentally, corporate earnings are exceeding expectations by a wide margin, and the economy is showing signs of turning a corner—much better results than most expected just a few months ago. And massive amounts of fiscal and monetary stimulus are now lubricating financial markets and boosting economic activity globally. 

Even if history doesn't hold true and stock returns are subpar or even flat from here, stocks are likely to remain the best option for long-term, growth-oriented investors. Just getting paid dividends on stock holdings is likely to provide much better returns than cash. The dividend yield on the S&P 500 is currently 2.60% compared to less than 0.50% for cash. The yield on 10-year US Treasuries is only slightly higher at about 3.60%, but if interest rates rise from here, prices of long-dated Treasuries will fall.

Considering the dramatic drop in stock prices during the recent bear market, gains in the new bull are likely to be dramatic as well. It's important for investors to capture the entirety of a bull's early stages to achieve long-term stock market returns, and stock market momentum can persist much longer than many investors expect. So, unlike the original version of the story, this hare is likely to leave the tortoise in the dust.



*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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