April 21, 2021
Good morning,
As the first birthday of our cyclical bull market approached last month we spent some time talking about bull market life spans and common behavioral changes across their life-cycles – on average. Recall that half of all cyclical bull markets end after a year, and that our current one showed all the signs of lasting two years or more. We also pointed out that on average, the second year of a bull market was typically marked by smaller market gains, rising market volatility, with stronger earnings and economic growth. Rising market volatility – hmm – it looks innocuous sitting there between smaller gains and stronger earnings in March, celebrating a birthday. Is it? No, not a month later, 2 days into another correction watching the market take away, in two days, what took 2 weeks to build – profits.
Rising market volatility means more and likely deeper market corrections. Rising market volatility means swift waves of fear washing over a crowd all hopped up on first year gains. That true fear is investor’s universal understanding that bull markets end with a correction – they don’t know which correction, but one of the corrections – typically the last one (sorry, I couldn’t resist, that’s not funny).
Let’s dispense with the emotion and follow the data. In a market that is vulnerable to a pullback – extremely high optimism, high valuations, over-bought conditions – as long as long term breadth is not too damaged on any declines, the cyclical bull market should remain intact. So far, early in the second year of this bull market, in the midst of another correction – we whistle past the graveyard even if we’re tip-toeing. No serious damage to breadth has been registered at this point. Onward …