As was highlighted in Ryan Puplava’s Market Observation yesterday (link), there are two sectors of the market that are moving to all-time highs as they leave the shackles of the 2000 secular bear market behind. What is particularly interesting is that these two sectors are entirely based on the strength of the consumer, a vital component of the U.S. economy considered by most—in lieu of high unemployment—to be dead in the water.
What investors must remember is that secular bull market tops are formed at a time when everything couldn’t be better or life brighter. This was the backdrop of the 1929 secular bull market top in which the U.S. industrial giant was firing on all cylinders; or the 1969 secular bull market top in which nothing seemed impossible as the U.S. put the first man on the moon; or the 2000 secular bull market top when we entered a supposed new era of technology and permanent growth. Conversely, when things look like they couldn’t get any worse and that the whole world is going to end, new secular bull markets begin to form. I remarked on this concept in an earlier article, “Can You Tell the Difference Between Gold & the S&P 500?” in which I used the following eye-opening graphics:
Source: Bloomberg
Source: Bloomberg
Suprise! Consumer Sectors Hitting All-Time Highs
Think about this for a second, when you think of all the news headlines, would you associate them more with a secular bull market top or a secular bear market bottom? While we could certainly have more negative developments ahead that could hurt the stock market, we are clearly closer to widespread pessimism than euphoria. And why is that? Because all the worst-case scenarios are now anticipated. Whether it's a European breakup, a hard landing in China, a debt implosion and so on and so on, these are all known and on the forefront of many investor's minds. When there's a "black swan" hiding behind every corner, where's the surprise?
That is why new secular bull markets begin when the news couldn’t be worse. By the very fact it is in the news suggests it is discounted and when the market discounts all the bad news it can, then it can begin a slow grind higher. This is exactly what consumer stocks have been doing since the 2009 lows and now they are hitting all-time highs! Shown below is the consumer staples sector which has not only exceeded its 2000 top but also its 2007 high.
Source: Bloomberg
Even the consumer discretionary sector is hitting new all-time highs as consumers continue to spend on both essential and discretionary items.
Source: Bloomberg
In comparing secular bear markets, shown below are the consumer discretionary and staples sectors from 1998 to the present alongside the Dow Jones Industrial Average from 1964-1984 with the Dow’s price shifted forward to 1998. You can see a familiar pattern in which the secular bear market in each is characterized by a long trading range spanning more than a decade followed by an eventual breakout of the range as a new secular bull market begins. As shown below, the consumer sectors have broken their secular bear market trading ranges and have entered new secular bull markets.
Source: Bloomberg
Summary
The point of today’s article is to remind readers that secular cycles are birthed in widespread euphoria and despair. We had clear euphoria in 1929, 1969, and 2000 at the prior secular bull market tops, and we had widespread despair at the 1942 and 1982 secular bear market bottoms. When you think about the March 2009 lows, do you think the atmosphere more resembled euphoria or despair?
There is a ton of negative news out there but much of this has been discounted, and while I am sure there are plenty of other negative developments out there that have not been discounted, we are clearly much closer to the end of the secular bear market in stocks than we are the beginning that occurred in 2000.
The fact that individual stocks and sectors like the consumer discretionary and staples sectors are hitting all-time highs illustrates that we are seeing the initial signs of a new secular bull market beginning in which the new leaders are emerging first. Thinking back to the early 2009 lows when it seemed the whole world was coming to an end, who would have picked the consumer sectors to be the first to breakout to new all-time highs when the U.S. consumer was declared dead? Reminds me of “The Death of Equities” Businessweek cover highlighted above that occurred just before stocks began the greatest bull market in history.
