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NEWS ANALYSIS

Bull market that has outlasted all previous runs gets whiff of extinction

A spasm of nearly uninterrupted selling has dragged the S&P 500 down 19.8% in three months

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"It was a remarkably long run. Overall, it was a very, very strong market up until the last couple of months. It's been a very good period, the last decade, for money management." - John Carey, managing director and portfolio manager at Amundi Pioneer Asset Management.

New York

IT has been derided as a house of cards, a gift to the one per cent, an experiment in monetary policy taken way too far.

Now, a bull market that for 10 years has confounded and chastened its detractors - by outlasting all its predecessors - is staggering up to death's door. And haters and admirers alike are turning out to pronounce last rites.

The fall has been swift, a spasm of nearly uninterrupted selling that dragged the S&P 500 down 19.8 per cent in the space of three months. The Dow Jones Industrial Average has plunged 5,036 points since its record, poised for its worst December since 1931. For the men and women who sold stocks and investment advice while the rally raged, it has made Christmas a time of nostalgia.

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"It was a remarkably long run," John Carey, managing director and portfolio manager at Amundi Pioneer Asset Management, said in a phone interview. "Overall, it was a very, very strong market up until the last couple of months. It's been a very good period, the last decade, for money management."

Not that it is over - necessarily. The S&P 500 is still seven points away from completing a full-blown bear market drop. Futures on the index fell as much as 1.1 per cent before rebounding to trade little changed as at 6:56 am London time on Wednesday.

Stranger things have happened than a recovery from here - the index came roughly as close only to rebound in 1998 and 2011. And even if the threshold does break, there is nothing magical about a 20 per cent decline. US President Donald Trump could right his ship, the Federal Reserve could stop raising rates - maybe the bear will go back into hibernation. As you may have heard: the fundamentals look strong. Gross domestic product is rising, profits keep going up, and economic data gives no obvious evidence of a recession. Things look particularly sturdy compared with past episodes of tumult that the bull withstood, periods such as 2011, when quarterly gross domestic product (GDP) growth twice turned negative, or 2016, when corporate earnings fell.

"One of the beautiful ironies of this whole situation is that in 2018 you finally feel like the economy is normalising to what we knew before the crisis," said Michael Purves, chief global strategist at Weeden & Co. "Until you got to this tax and spending deal a year ago, it was one of the most hated bull markets. The markets steadily climbed one wall of worry after another, and the problem was that the economic data did not confirm it."

Hated it was, and for many the rally represented a moral quandary, particularly in the early years, when stocks served as a kind of daily referendum on actions by the Fed to end the financial crisis. In that role, buoyant markets became a target for those who saw a charity programme for the very people who laid the economy low while at the other end of the spectrum, critics accused the Fed's Ben Bernanke of engineering gains to hide economic wounds that never healed.

Profits rose, fuelling the bull, but wages stayed stagnant. Most of the time since 2009, gains in the S&P 500 have surpassed gains in GDP and worker pay by gaping margins.

"The market surprised everyone both when it bottomed out and how quickly it rose off those lows," said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. "The problem with looking at the stock market as a way of saying the financial crisis is over is that it's only one piece of the puzzle," he said. "As far as an economic recovery, it's been very sluggish."

Now, stocks are plunging as the stimulus that Mr Bernanke enacted is being withdrawn by a new Fed chairman, Jerome Powell. Inevitably, it is spurring debate over whether the financial crisis ever ended.

"The reason I'd say it's still with us is look at the Fed's balance sheet," Mr Zaccarelli said. "This year has been impacted by quantitative tightening. As the Fed continues to run off its balance sheet, it's a vestige of the crisis - and it's still with us today. Investors remain very scarred by what happened in 2007, 2008 - you can see it in investor anxiety."

From the financial crisis bottom in March 2009, the S&P 500 had more than quadrupled by its September high, paying a total return of 19 per cent annually. Investors made more money owning stocks in 2013 than in any year since the dot-com bubble - and anyone who sold when it was over has foregone gains of 151 per cent in Microsoft, 237 per cent in Amazon.com, and 345 per cent in Netflix. One company, Nvidia, tripled in 2016, nearly doubled again last year, and was up 49 per cent in early October. Now, it is down 34 per cent and headed for the worst return since the financial crisis.

So while it may be hard to see things in the future that justify a hammering as painful as this one, a few things in the past suggested there was reason for worry.

"The biggest names just got bigger and bigger, and the leadership became very narrow and we became reliant upon a handful of names to generate returns. And then when some of those names had some fundamental stumbles, the market was ill-equipped to deal with that," said Michael O'Rourke, JonesTrading's chief market strategist. "The bottom line is markets are supposed to go in both directions." BLOOMBERG