Plenty of investors, analysts, and pundits are asking how long this will continue and what the reasons are for the rally, but another question percolating is whether we entering a new secular bull market.
“What you’re reading about online and seeing...in the ebullience of the way stocks are trading - there’s a sense that this is it,” says Josh Brown, vice president of Fusion Analytics and author of the Reformed Broker blog.
While Brown doesn’t know if we have indeed entered a secular bull market, he would venture to say not yet.
Here’s why it matters...
As Brown writes in a recent blog post, there’s an assumption we have been in a cyclical bull market within the context of a secular bear market that began in March of 2000. In a secular bear market, the market goes up and down but it makes very little forward progress. The last one was 1966 - 1982.
“In 1966, the Dow hits 1000,” Brown explains. “If you fell asleep for 16 years and woke up at 1982, you’re still at 1000.”
Though there were cyclical bull and bear markets in between, which were opportunities to make or lose money, the market didn’t go anywhere over the longer term.
If we are entering a secular bull market, this changes the strategies that will work for investors.
“In a secular bull market, every dip is a buying opportunity,” says Brown. “Volatility subsides almost permanently, and there’s a change in behavior.”
This is in contrast to a secular bear market where, Brown gives the example, you may be worried about a 25% correction, so in a 5% correction, you’re concerned about a bigger sell-off.
When it comes to the rally we’ve seen since the beginning of the year, Brown says forget earnings, it all comes down to the loose monetary policies of the Federal Reserve and other central banks.
The Fed is buying $85-billion a month in longer-term bonds and mortgage securities. We’ve already seen trillions of dollars in asset purchases since the financial crisis, through two prior rounds of quantitative easing (i.e. QE1 and QE2). And the central bank has said it expects to keep interest rates near-zero until unemployment drops to 6.5% and as long as inflation is not forecast to rise above 2.5%.
The Bank of England has been pumping money into the economy since 2009, as another example.
Meanwhile, the Bank of Japan just doubled its inflation target to 2% and announced it will commit to unlimited asset purchases similar to the Fed’s, starting next year.
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