What really fueled the bull

Both earnings and revenue growth have kept pace with the astonishing post-crisis bull market that is today celebrating nine years since the bottom. Buybacks helped, but they weren’t the whole story. Corporations got lean and mean, setting up big earnings growth from the economic nadir. Additionally, whole new industries like social media and the iPhone app economy took flight. US companies also penetrated into global markets and found entirely new avenues of growth opportunity.

But one other element has also been at play – negative emotions around stocks and utter disbelief that anything could go right again. There were lots of authoritative voices throughout the post-crisis recovery telling you not to believe your eyes and that capitalism as a mechanism for investment gains was going to be fundamentally ruined forever. This premise turned out to be very stupid.

But millions of investors – both amateur and professional – had succumbed to it. They were susceptible because two 50% crashes for the stock market occurring inside of a single eight year period had challenged our collective faith in the future and in the system. Some people came around sooner than others.

Here’s my pal Liz Ann Sonders of Charles Schwab with an important observation:

Suppressed sentiment was likely a function of the muscle memory of the financial crisis and the severity of the attendant bear market—especially given it occurred within a decade of the prior brutal bear market starting in 2000.

AAII’s bullish percentage has averaged less than 37 during the current bull market; which is in contrast to an average of more than 44 during the prior bull market which ended in 2007.

U.S. equity fund flows, even including the much more popular equity ETFs, on a net cumulative basis have remained in negative territory during the entire bull market (you have to go back to pre-financial crisis to find positive cumulative flows).

My personal opinion is that the pervasive negativity has probably lengthened the cycle. Even as we were making fresh record highs in 2013, five years ago, people still spent the preponderance of their time wringing their hands about all of the potential threats and risks. Given how recent the scars were, this is entirely understandable.

It’s also why the best investment strategies are the ones that you can live with – durability is better than “optimized” and rules-based is better than “let’s see how we feel.”

Happy ninth birthday off the bottom – 300% and counting for the S&P 500, 390% if you include dividends!

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