There’s something poetic (or maybe “tragi-comic” is better) about the 10th anniversary of the longest bull market in history coinciding with the week during which the ECB effectively sealed the deal vis-à-vis global central banks embarking on yet another coordinated stimulus effort in the face of a worsening global growth outlook.
A decade on from the start of what would ultimately morph into a 306% rally off the March 2009 lows in the S&P (401% including dividends), we find ourselves pondering the prospect of doling out more monetary cowbell, in an effort to keep the party going, despite the fact that our “return on investment” (if you will) in terms of real economic outcomes has been questionable, at best.
Here’s an update on Goldman’s “financial assets versus real economic outcomes” chart with serves as a rather poignant reminder of the fact that the transmission channel between liquidity tsunamis and markets is far more efficient at boosting risk-taking by traders and investors than the “wealth effect” is at juicing the economy.
That chart, as ever, raises serious questions about the relative wisdom of persisting in policies that pretty clearly amount to pushing on a string when it comes to the real economy, even if they are tantamount to pouring gas on a fire when it comes to igniting rallies in financial assets.
Before we get off on a policy tangent, let’s steer this one off the rumble strips and back onto the highway, where that means bringing you some quotables from a Goldman note out Friday evening that serves as a kind of retrospective on the bull market.
“The rally nearly ended on several occasions when it just missed the arbitrary cutoff of -20% that typically denotes the end of a bull market”, the bank writes, documenting the bull’s brushes with death as follows:
At one point in 2011, the S&P 500 had dropped 19.4% below its high. More recently, in late 4Q 2018 the index traded 19.8% below the September all-time high. Realized volatility has measured 16.0 since 2009, in line with the 50-year median of 16.1. For now, the bull marches precariously on.
Yes, “for now.”
Breaking things down, Goldman notes that since 2009, earnings growth has been the main driver of US equity returns, accounting for almost three quarters of the S&P’s rally. EPS over the period jumped from $67 to $161.
You should note that the picture looks a bit different if you break up the bull market into two phases. But more importantly, consider that just because 75% of the rally is attributable to earnings growth does not mean that QE and stimulus weren’t responsible for the bull market. Many a moronic pundit has suggested as much on Twitter over the last five years, and whenever you hear someone say that, you should immediately remind them that the whole point of cutting rates and resorting to ultra-accommodative policies was to rescue the economy and create a virtuous loop, whereby corporate America benefited from a policy-assisted recovery.
There’s no way to know what the trajectory for corporate profit growth would have looked like from 2008 forward had Bernanke just decided to let creative destruction run its course, purging misallocated capital and paving the way for two years of soup lines.
Regardless of whether you believe we’d all be better off in the long run had we just taken the bitter medicine during the crisis and suffered through a depression, my guess would be that a 10-year chart of S&P EPS growth would look a lot different had that been allowed to happen.
Moving along, you can see from the table above that Info Tech accounted for 22% of the index-level return, while financials accounted for 15%. Goldman also reminds you (in case it’s slipped your mind), that just ten stocks have accounted for a quarter of the S&P’s 10-year return. To wit:
AAPL shares generated a 32% annualized total return during the past 10 years and single handedly accounted for 20 percentage points of the S&P 500 total return. Powered by the iPhone, AAPL sales rocketed upwards at a 23% annualized rate and EPS surged by 32% annually for the past decade. With such dramatic growth in the top- and bottom-line, the slip in forward P/E multiple from 15.2x to 14.3x hardly mattered. Microsoft is the opposite story. In delivering a 25% annualized total return during the past decade, MSFT shares were the second-largest contributor to the S&P 500 index return since 2009, accounting for 17 percentage points of the index return. While MSFT sales and EPS grew at an annualized rate of 7% and 9%, respectively, during the last decade, the forward P/E multiple expanded from 8.0x to 23.0.
So, what’s in store as the bull market technically enters its second (!) decade? Well, Goldman sees the S&P grinding sideways to 2,750 through mid-year. More to the point, the bank sees stocks going nowhere between now and the end of H1, although the path to “nowhere” could well be a rocky one.
You’re reminded that earnings growth is expected to turn negative in Q1, and while optimists generally insist that a “hockey stick” inflection in Q4 will save the year (where that means EPS should grow by something like ~5% for 2019 on the whole), more and more analysts are coming around to the idea that that may be wishful thinking.
Read more on the earnings recession
Looking out to year-end, Goldman sees SPX 3,000 despite margin pressures. In other words, they’re counting on top line growth. As far as multiples go, Goldman says valuations “will remain well below their recent January 2018 highs.”
Happy bull market anniversary.