B-U-L-L: Anatomy of a Bull Market

Today’s investors have not seen a bull market in a very long time.  Some have never invested through one at all.  The last time we saw a true bull market was in the 1990s right before the technology bubble of 1999-2000 took hold.  The stock market downturn in 2008-09 was more of a shock-fear reaction to the financial crisis than it was the end of a bull market. 

The market is certainly in a bull market today.  We’ve used the acronym B-U-L-L in the past to describe the characteristics of a bull market and help us understand market behavior.

U.S. Corporations Going Global for Growth

Since 2009, stock prices are up well over 100%.  The stock market has moved higher for a variety of reasons - including an economy that has improved dramatically from the Great Recession and continued stimulus from the Federal Reserve to keep interest rates low (read our post on the economy and interest rates here). 

The primary driver for growing prices has been improving fundamental values.  Long-term stock market appreciation cannot exist without increasing dividends and earnings.  As we have said many times, dividends have shown to be highly correlated with stock prices over the long-term.  Since dividends are real cash paid out to shareholders, they ultimately must be backed by actual corporate earnings.

Is The Market Overvalued?

The stock market is in constant conflict between buyers and sellers.  Aside from very short-term traders, these purchases and sales are based upon the perceived value of the underlying company being greater or lesser than the current trading price.  In aggregate, all these many purchases and sales determine stock prices. 

Whether or not the market is very good at accurately pricing a particular stock close to its intrinsic value has been thoroughly debated, but our opinion is that the market gets it wrong many times.  An overall bullish sentiment about a particular company will drive its stock price beyond its intrinsic value, while another stock will get hit hard by missed earnings or other pessimistic news.

What drives these wild fluctuations above and below fair value?  Two major forces: fear and greed.