The current bull market, which started in early 2009, has been called “the most hated bull market in history.” Investors who cashed out after the last crash see how much they could’ve earned had they stayed in, and they’ve been waiting — in vain — for a correction that would see stocks return to levels they can comfortably afford.
Stocks climb a proverbial wall of worry, and negative sentiment among rank-and-file investors (what Harry calls “the dumb money”) is actually a contrarian bullish sign. It is when sentiment gets one-sidedly bullish and investors throw caution to the wind that you know a major top is near.
But with the S&P 500 now sitting near all-time highs… and tripling in value from its 2009 crisis lows… is it really fair to call this rally “hated?”
Let’s take a look at investor trading on margin. When investors are feeling bullish, they are a lot more likely to trade aggressively… and to borrow money to do it.
As you can see in the chart, investor margin debt as a percentage of market cap does indeed tend to surge leading into a major market top, and fall dramatically during a market decline. We saw investor margin debt jump from less than 1% of market cap to nearly 2% during the great 1990s tech bubble. And it had another major spike during the bull market of the mid-2000s.
But today, margin debt is beginning to trend lower. It’s still at levels that are high by historical standards, but we can attribute much of that to two factors:
- Ease of margin trading with discount online brokers.
- Falling interest rates over the past 30 years… and particularly over the past 6 years.
Remember, the Fed has kept short-term lending rates at close to zero for six years now, so it’s natural that investors will borrow more aggressively on margin. “Free money” makes carry trades that wouldn’t be profitable under “normal” conditions worth it! Seen in this context, today’s margin debt levels show investors are less enthusiastic.
So, at least by this metric, today’s bull market really is unloved, at least by the standards of recent major tops.
Does this mean that it has longer to run? Maybe. I’ll leave the precise market timing to Harry. But I would add that the market is very expensive by historical standards and that stocks are no longer enjoying the major tailwind of falling long-term bond yields.
So, whether or not we see a major correction in the coming months, I would keep returns expectations modest for the next several years.
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