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Yes, Your Bull Market Debate is Dumb

I recall watching a baseball game earlier this year in which the announcer said that Juan Soto of the Washington Nationals was the youngest player ever to hit a home run at a particular baseball field. I thought to myself: “wow, what an achievement. No, wait a minute, that’s a totally irrelevant stat.” Lots of people had hit home runs at that baseball field. And lots of people had hit home runs at a younger age. The fact that Soto hit a home run at that park at that particular age had no bearing on any future performance or really anything. It was an interesting, but mostly meaningless stat. This happens all the time in sports and finance – someone will spout off a statistic that sounds kind of interesting, but when you think about it some more it actually has no relevance on, well, anything.

On that note – have you heard the amazing news? The current rally is the longest bull market in history clocking in at 3,453 days. Of course, a bear market is defined as a 20% decline so nevermind that the S&P 500 dropped 21.6% intra-day in 2011 because, technically, the max closing decline was just 19.2%. So I guess we don’t get to count that. Also, nevermind that the 20% figure is totally arbitrary. So, we have an arbitrary statistic that was technically breached….The point is, we are masters at creating interesting sounding narratives based on statistics that are mostly meaningless.

To put this in perspective, think of it this way. In the past I’ve described the stock market as being very similar to a 30 year investment grade bond that has earned about 7.5% per year.¹ If you hold that instrument for 30 years the odds of you losing money are extremely low. This makes sense as corporate cash flows are uneven and can take time to accrue. Add in the fact that the market is constantly trying to predict what those uneven cash flows will look like and the result is a market price that is even more uneven than the actual cash flows.

But think of it this way – imagine buying a 12 month T-Bill that earns 2.5%. That bill has a price that changes every day. But if you hold it for the full 12 months the odds of you earning less than 2.5% are virtually 0%. But now consider that the price might fluctuate and imagine if the mainstream media made up narratives about how the bill has gone 4 straight months without a price change greater than 0.5%. You might say, “wow, this sure is a long bull market in T-Bill prices!”. You can see how this would be very silly, but that’s the exact equivalent of what people do all the time with the stock market when they take an inherently long-term instrument and reduce it to days, months or years.

Now, I know that most people don’t have a legitimate 30 year time horizon so viewing the stock market as a 30 year instrument can be as irrational as viewing it as a 30 day instrument. But that’s the main reason we diversify. We diversify with shorter-term instruments to reduce the uncertainty of the cash flows that our assets generate over time. Unfortunately, these useless narratives feed on our short-termism and cause us to think of the stock market as something it’s not.

¹ – This is an approximate break-even analysis, outlined in my paper on portfolio construction, that determines what the duration of the stock market currently is. 

Related – How to Avoid the Problem of Short-termism.