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The U.S. stock market has hit all-time highs. Does this mean we’re in the emerging stages of a new secular bull market? Let’s look at past secular bull and bear markets to see whether there are trends and similarities that may give us clues. Two periods stand out as possible analogues: the 1950s and ’60s and the 1980s and ’90s.
While the period leading up to the secular bull market of the 1950s and ’60s was quite different in some ways from the current one, there are notable similarities. One is the persistent deflationary mindset that existed at the time, despite extreme periods of war-related inflation. Also, and perhaps most important, it was an era of QE from the Fed.
Yes, you read that right. While it is a common belief that the Fed's QE since 2008 is unprecedented, in fact it isn’t. From the mid-1940s to the early ’50s, the Fed capped bond yields by buying most of, if not all, the Treasury supply. That’s QE in almost everything but name. As a result, interest rates remained remarkably low and stable despite wild swings in inflation.
What’s also interesting is that, despite these swings in inflation, investors didn’t challenge the interest-rate caps. One would assume investors would not want to hold long bonds yielding less than 3% when inflation was at 25%, but that’s exactly what they did. That’s how powerful the deflationary mindset was at the time.
Another compelling aspect of this analogue is that when the Fed finally stopped manipulating the bond market, the world did not end. Currently, with the Fed presumably ending QE, there’s a belief among some investors that the market is a house of cards that will collapse as soon as the Fed stops printing money.
However, the ’50s analogue seems to disprove that theory. Although interest rates did start to rise from the early ’50s through the late ’70s, the stock market went up—a lot—for the first 20 years of that cycle. From the 1949 launch to the 1968 secular peak, the S&P 500 racked up an annualized return of 16%.
As in the 1950s and ’60s, the secular bull market of the ’80s and ’90s ran close to two decades. It also delivered similar above-average returns, of about 20% per year. But there are several differences to consider, particularly the level and direction of interest rates. The early 1950s marked the end of WWII repression and the beginning of a secular bear market in Treasury yields, from 2.5% to more than 5% in the late ’60s, and ultimately to double digits in the late ’70s. The 1982 to 2000 period was the opposite. It was an era of disinflation, and long-term yields fell from 13% in 1981 to 5% in 2000.
While the resemblance of current market dynamics to those of previous secular bull markets is cause for optimism, there are also potential impediments—particularly the differences in demographics. Back in the 1950s and ’60s, and also during the ’80s and ’90s, the post–World War II and baby boom generations, respectively, were in full swing—buying homes, investing, and spending money. But most of the post-WWII generation is retired, baby boomers are heading into retirement, and the demographic wave has now reversed. As a result, this trend might render the years ahead as less likely to sustain the kind of growth that occurred during previous secular bull markets.
Then there’s the federal debt: from 1949 to 1968, the U.S. debt-to-GDP ratio fell from 82% to 43%. From 1982 to 2000, it held steady, at around 40% to 46%. But since March 2009, it has risen from 68% to just over 100% (as of June 9, 2014). Such a high level of debt could put the U.S. at risk of several unfavorable consequences, such as lower GDP growth.
So, what’s the key takeaway from all this? While each of the two historical secular bull markets was unique, they shared a common theme. They both spanned almost two decades in which the market went up a lot more than it went down. The early ’50s are of particular interest, because the Fed was engaged in a form of QE then, as it is now, but when the central bank stopped manipulating interest rates, the stock market did not collapse—yet this is a common fear today. There may be an important lesson here.
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