The film, Oz: The Great and Powerful, the prequel to The Wizard of Oz, premiered last week. The story of how the wonderful wizard overcame the risks and prevailed worked its magic on moviegoers and proved popular with a strong box office showing. In the same week, the Dow Jones Industrial Average (Dow) proved popular with investors as it powered its way to a new all-time high, as it overcame many risks to reach the fourth anniversary of the start of the current bull market from the low point on March 6, 2009.
The Dow stands 115% higher than it did four years ago. However, if we do not disregard the stocks behind the curtain of the great and powerful Dow, we see that this time the index no longer holds the stocks of AIG, Citigroup, and General Motors (among others) as it did at the prior peak on October 9, 2007. The many changes to the 30 companies that make up the Dow make it worthwhile to take a look at the stock market defined by broader indexes like the NASDAQ and S&P 500.
- On the 13th anniversary of the peak in the NASDAQ, this tech-heavy index is still more than 35% away from the peak reached on March 10, 2000. Nevertheless, this index has outperformed the Dow with a gain of 149% over the past four years.
- The broadly diversified S&P 500 Index is also outpacing the Dow with a gain of 125% since its March 2009 low and experiencing the second-best four-year bull market in history, second only to the bull that began on August 12, 1982 [Figure 1].
What is next for the bull market? The good news is that since WWII, only two of the six bull markets that made it to their fourth anniversary failed to make it to a fifth. Each of those four bull markets that extended through a fourth year posted a double-digit return in the year leading up to the fifth anniversary [Figure 2].
The current bull market is not likely to be over, but the bad news is that we may need a pullback to sustain it. Of the 18 pullbacks of 5% or more over the past four years, the current rally, at 114 days without a 5% or more pullback, is one of the longest of the bull market [Figure 3].
Rather than a sign of weakness, pullbacks are often the pauses that refresh the bull market. When the market has avoided pullbacks for an extended period, the bull market has tended to be shorter and result in a bear market when the decline eventually came. For example, the long bull markets of the 1980s and 1990s had dozens of 5% or more pullbacks with many of 10% or more, whereas the much shorter four-year 2003 – 2007 bull market did not have a single pullback of 10% or more and ended by erasing the entire bull market gain.
Therefore, pullbacks do not have to be viewed as wicked; instead we should cheer them, since they help to sustain the bull market and provide opportunities for investors to put money to work at a discount.