It's just about the most audaciously optimistic investment opinion one could utter, yet a relative handful of Wall Street voices is beginning to say it, out loud and assertively: This market has passed through a “1982 moment.”
That is to say, they believe the stock market has experienced the sort of decisive, powerful liftoff from a generational low that should last for years to come, making every setback to come a buying chance, and carrying the indexes to heights hardly any sober forecaster is now contemplating seriously.
Beginning unheralded in the Rust Belt, oil-embargoed, inflation-whipped malaise of 1982, stocks began what would become – with occasional rude downside interruptions – an 18-year renaissance, ultimately rising 14-fold until forming the most extreme and vulnerable of bubbles culminating in 2000.
[Sticklers consider this period to contain at least two bull phases, separated by the shallow 1990 bear market after having been rattled by the swift ’87 crash. In retrospect, though, it goes down as nearly two decades of general ascent, rewarding buyers of every break until it all ended.]
A rival to the '80s bull market?
Among the small but seasoned subset of market handicappers harkening to ’82 is Richard Bernstein, longtime investment strategist who now runs Richard Bernstein Advisors and manages the Eaton Vance Richard Bernstein Equity Strategy fund (ERBAX). Since at least last year, Bernstein (a vocal bear in the frothy latter years of the ‘90s bull market) has been suggesting, “The current bull market might be one of the strongest of our careers, and could potentially rival the 1980s bull market.”
Mary Ann Bartels, the former Bank of America Merrill Lynch (BAC) technical strategist who recently became chief investment officer for portfolio strategies in the firm’s private-client division, unambiguously classifies today’s environment as a “new secular bull market,” with years to run higher notwithstanding inevitable corrections along the way. To her, the fact that the Standard & Poor’s 500 in recent months broke above the level that had capped it between 2000 and 2013 marks a significant new market phase.
Chris Verrone, a market technician at institutional research firm Strategas Group, has been correctly bullish this year, while citing a number of echoes with the early part of the ‘80s run-up, including the leadership of healthcare and consumer stocks. He has also noted – as a positive sign, by contrary logic – how few of his clients think it’s likely we’ve seen another 1982 just pass or that we soon will.
The idea that the current four-plus-year uptrend could signify a vaguely similar multi-year move goes against the more popular view that stock prices are enjoying a pleasant but unsustainable upside interlude, pushed aloft by the uneasy-feeling easy money from central banks and companies unduly flattering their results with miserly cost-cutting, cheap debt and stock buybacks.
The burden of proof
The burden of proof for the ’82-replay case is high, for sure. Yet the history-attuned group of market handicappers who are making it can point to some broad similarities.
As in 1982, stocks in recent years have been disdained and under-owned by the public and institutions such as pension funds, after a “lost decade” in which the market was halved twice and the economy seemed chronically impaired. Both in the early ‘80s and in 2009, stocks bottomed amid a pervasive sense of American declinism, political dysfunction and unprecedented deficits.
Bernstein notes the initial surge off the lows in both instances was strong, more than 100% in a few years, but was viewed with deep suspicion. The recent pickup in retail flows into equity funds has raised some alarms that the rally has finally pulled in the weaker holders in time for it to fizzle. Yet Bernstein says it almost always takes a few years for a bull market to attract reluctant cash, and contends small investors never committed fully to stocks in the '80s until January 1987 saw a 13% gain. (Six months of heady upside ensued, before the crash.)
Federal Reserve policy was deeply distrusted in the early ‘80s, when investors worried the Volcker central bank would tighten too much and prompt another recession, as it did in 1980. Today investors fear the Fed will remain too stimulative for too long, and/or will botch the process of normalizing policy.
Bartels thinks the breakout above the 13-year trading range is quite similar to the way the market finally was liberated from its '60s-'70s range, which also featured a pair of savage bear markets and in which Dow 1,000 was the ceiling.
Another similarity, if a loose one, is that the U.S. economy did not grow particularly quickly in the ‘80s, but the expansion lasted quite a long time by historical standards. The bull case today rests on the expansion being prolonged in a way that helps consumers and companies heal without inviting hostile action from the Fed.
Many will gripe that the unprecedented post-crisis response, daunting developed-economy indebtedness, the radically global economy and the blinding pace of technological change make historical analogies moot.
The more things change, the more they stay the same
This is false. Details are always different in every cycle, but crowd psychology doesn’t change in its rhythms and habits. A Big Mac is drastically different from buffalo meat eaten in the 18th century, but the body metabolizes each protein molecule the same. So it is with the way markets – or collections of profit-seeking, loss-averse humans – ingest and respond to information patterns.
Just over four years after the August 1982 low, as 1986 ended, the S&P 500 had gained more than 130% – quite close to the 140% or so the index has risen in the 54 months since the March 2009 low. From that point in the ‘80s, stocks melted up through summer 1987, crashed by more than 25%, then resumed their rise, ultimately gaining 50% from the end of 1986 through 1989. It would be foolish to assume this is a close model, of course, but there it is.
The more persuasive objection to the 1982 case is that stocks this time around never got as cheap or as hated, and American business never hit such an ignominious bottom.
Indeed, the idea that we are somehow early in this cycle doesn’t fit with the above-average earnings multiples on stocks and the fact that profit margins are already near historic highs. In 1982, for example, the value of the U.S. stock market was 40% of the gross national product. At the 2009 bottom it was 60%, and now is above 100% – higher than any time outside the late-‘90s bubble years.
This time, it seems, central bank policy and a still-hypertrophic financial sector have pulled forward the asset-market recovery, as we await a fuller revival of the real economy that would help substantiate it.
Bartels' Merrill colleague, technician Stephen Suttmeier, injects another sobering note. While endorsing the view that a secular bull run is underway in the mode of the 1950s or '80s, he pointed out Thursday that, after a break to a new all-time high, "bears typically have a parting shot." In the last super-cycle, indexes made new highs in 1980, before a 27% tumble amid a wrenching recession, into the ultimate 1982 launch point. This would be severely painful for today's stock buyers if it were to repeat.
It’s also doubtful, for what it’s worth, that many market forecasters in 1982 were walking around invoking the prior time a new secular bull market emerged, saying, “This feels just like 1949…”