Oct. 1, 2004 — With the average domestic equity fund up a modest 1.04% this year through the third quarter, including a 2.81% decline in the third quarter, is it time to say good-bye to the bull market?
There is a “possibility” that the market is in the midst of a secular bear market interspersed with short-term, cyclical bull markets, although it is too soon to tell, said Sam Stovall, chief investment strategist at Standard & Poor’s.
A cyclical bull market starts with a 20% or more bounce off of a prior bear market’s closing low, as Standard & Poor’s defines it. A secular bull market sets new record highs. At a 10% compound annual rate, it would take less than two years for the Dow Jones Industrial Average to establish an all-time high, less than four years for the S&P 500-stock index, but more than ten years for the Nasdaq.
Standard & Poor’s defines a bear market as a decline of 20% or more from a recent high. The S&P 500 would need to close at 926 before Standard & Poor’s investment policy committee tagged the current weakness as entering “bear” territory.
Domestic equity funds’ third-quarter 2004 results are in keeping with the latter stages of a bull market, with large-cap value funds holding up better amid general declines of the domestic equity funds style categories. After bidding up smaller, lower quality companies in the early stages of a bull market, investors traditionally turn to larger, more stable, and higher quality companies as growth becomes harder to find.
The current bull market may be short-lived because stocks rose strongly last year, when the S&P 500-stock index surged 28.67%. “Many cyclical stocks reached their price potential early” in the current bull market, said David Scott, senior portfolio manager of Chase Mid Cap Growth/A (CHAMX. Believing that the stocks are in a “long-term bull market,” Scott said last year was a cyclical bull market, with some cyclical outperformance carrying over into this year.
Some investors are questioning the health of the current bull market because extended sideways-to-lower trading periods have traditionally followed past secular bull markets as the market digests outsized advances, such as from 1982 to 2000. As a result, Stovall says many investors are wondering if “Dow 10,000 will be a repeat of Dow 1,000,” when, after the bull market of 1954 to 1966, when the Dow peaked at 1,000, it didn’t “materially” rise above 1,000 until 16 years later in 1982. The Dow, which fell 2.27% this year through the third quarter, closed at 10,080.27 yesterday.
Several factors may be in place for a sideways market. Sizable Federal budget deficits and low personal savings rates are likely to limit inflows into the stock market. Rising interest rates are also likely to slow future stock gains.
The market may also be hurt as U.S. economic growth is limited by higher oil and other commodity prices due to rising demand worldwide, particularly in China. “Oil prices at $50 a barrel, which equate to a consumer tax, won’t help the [U.S.] economy,” said Jay Kaplan, co-manager of Royce Fund Value/Inv (RYVFX). The second best performing small-cap value so far this year, Royce Value rose 16.3% as of the end of the third quarter.