The title of this post does not refer to American composer Charles Ive’s wonderful 5 minute orchestral composition, but instead what would motivate investors to avoid history’s longest bull market in stocks. The answer may have relevance for how the market reacts as we exit COVID-19 lockdown.
The time between the Financial Crisis of 2007-2009 and the beginning of the Coronavirus Pandemic was the longest bull market in history. If you had any doubts about the bull market’s durability in its early years, you certainly had the opportunity to make up for lost time over the ensuing decade.
The chart below would seem to depict a different era; one when investors shunned stocks in favor of bonds. Truth be told, this chart of history’s longest bull market shows that investors favored bonds over stocks by a 3 to 1 ratio. This may seem counterintuitive, but it makes sense when you view it through the lens of behavioral economics.
Investors feel a loss much more intensely than they do the elation of a gain. The losses that many investors experienced during the financial crisis (markets dropping by more than 50%) kept them from not only recouping their losses, but earning significant gains going forward.
A different type of loss aversion may be at work with COVID-19. People may be concerned about the potential loss of a job, temporary pay cuts never being restored, the nasty bout of an illness for which there is yet to be a cure, or death. To what extent these fears impact consumer’s desire or ability to spend at the rate they have in the past remains to be seen.
Markets are known to anticipate trends, discounting the future to the present. At this juncture, we don’t know how successful markets will be in discounting the psychological impact of COVID-19 on consumer spending. That could be a much more difficult task than discounting future corporate earnings.
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