March turned out just fine. Led by sectors most closely tied to the economic re-opening narrative, i.e., financials, industrials, materials and transportation stocks, a fully diversified equity portfolio rose more than 3.2%. With $1.9 trillion of new COVID-19 relief funds now flooding into the economy plus the announcement of the Biden Infrastructure package, the stage is certainly set for the continuation of what I believe will come to be known as the long, secular bull market of the 2020s. But the tenor of the markets changed considerably in March and I will return to this below.

What sectors did well?

When one thinks of bull markets, particularly in the earlier stages, one most normally thinks of risk-taking in more cyclically oriented sectors being rewarded, while those hiding in more ‘defensive’ groups such as electric utilities and consumer staples (soft drinks, household products among others) falling behind. Though that had been true through the end of February, it certainly was not in March. Pepsi and Duke Energy did just as well as Bank of America and JetBlue. AT&T, a relic of yesteryear if there ever was one, jumped more than 10%.

Just as interesting is what didn’t do well. Small Cap stocks in general and energy stocks had exploded to the upside in the prior four months but both weakened considerably late in the month. The same happened to semiconductors. In fact, the entire commodity complex, to also include copper and gold/silver, weakened. These are all ‘Risk On’ but lagged badly.

There was also a divergence of performance between the gains for stocks within Developed International countries, i.e., Europe, Japan, Australia, Canada, and the declines for those in Emerging Markets, especially those based in China. With the United States clearly leading the COVID-19-emergence race and with our economy accordingly far more on the move than those overseas, there should be no surprise that the relative value of the U.S. dollar strengthened so considerably. But this should have had a fairly uniform impact on all foreign-currency-based investment assets, and it didn’t.

Year 2 of a bull market…what can we expect?

So, it’s welcome to Year 2 of a bull market! As history has proved many times before, the second year of a secular bull takes on an entirely different tone than from the year before. Fueled by a massive injection of liquidity by monetary policymakers, Year 1 is essentially a shaking off of the severe negativity from the bear market that preceded it. Year 2 becomes ‘Yeah – Prove it!’. From the bottom on March 23, 2020, stocks advanced more than 75%, making it the best performing Year 1 in history. From now, a stronger and re-accelerating economy will now have to justify not only Year 1 but also provide the oomph for its continuation through Year 2 and into the years beyond.

How does this compare to past bull markets?

A little more historical perspective, if I may. There have been 11 bull markets since the mid 1950s. Bearing in mind the ‘tails’ of extreme length and performance, the average bull market rises nearly 200% and lasts just shy of five years. For all 11, the average Year 1 is a very spiffy 42% which then drops off to about 13% in Year 2. Obviously the relatively small sample size means that there is a wide dispersion around those averages. This means that there have been a number of bulls that ‘fizzled out’ before really making a difference, such as the one from 2002-2007 in which stocks barely doubled (up about 100%).

But that has not been the case with those truly spectacular Year 1s. I was a Wall Street rookie on August 13, 1982, when stocks ran off on a 58% tear the next 12 months. With some fits and starts along the way – including only a 2% advance in Year 2 – stocks finished on more than a quadruple before the next bear market of consequence...and it set the stage for another quadruple in the 1990s. I’d had a little more experience when March 9, 2009, rolled around, the depth (for stock prices) of the Great Financial Crisis of 2008-09. 69% later, on March 9, 2010, concluded Year 1. Year 2 was just fine, up close to the 13% average, and by early 2020 the bull market scorecard had, again, registered more than a quadrupling of stock prices. Of course, the depth from which they emerged had a lot to do with the rebound. It is not an understatement to call those ‘generational lows’ for both stock prices and economic activity.

2020s could be a reboot

So, unlike those ‘merely average’ bulls, what I believe the decade of the 2020s will share with that of the 1980s and the 2010s is a total re-boot of the underlying economic drivers that had created, or had at least allowed for, the deeply recessionary forces that preceded it. The re-boot of the 1980s came from a complete eradication of the ‘stagflation’ (stagnated economic growth with spiraling inflation) that had taken over the 1970s. Propelled also by the economic ‘coming of age’* of my Baby Boomer generation, it was a long-lasting re-boot that proved sustainable for almost two full decades. The re-boot of the 2010s was all about eliminating economic growth based purely on leverage, which had manifested itself most especially in residential real estate, the most macro of all asset classes since it affects everybody.

How sustainable is a reboot?

However, even as vigorously as it began, the re-boot of the 2010s would prove unsustainable. Perhaps disillusioned by the two economic downturns and accompanying bear markets of 2000-01 and 2008-09, the Baby Boomer generation which then controlled all the wealth, at every level of society, became highly transactional. Tax policies in the latter half of the decade made it worse. Nominally the economy was strong but my metaphor for the jobs that were being created by late-2019 was ‘folding towels and dealing blackjack’. Even the highly important technological advances of the decade were more geared to enhancing the experience of the moment, not to developing anything sustainably productive for the future. Plus, the climate worsened and our societal and physical infrastructure deteriorated…then COVID-19 hit……

Infrastructure package on the way in the 2020s?

So here we are with what I believe is another generational opportunity. In the wake of 1982, we maxed it out. Not so much in the wake of 2009. I have written in prior Updates about the potential for a major infrastructure package to do for the 2020s what tax cuts did not do for the 2010s, provide a policy framework for growth based on investment, indeed the potential creation of new industries around climate mitigation, in addition to the necessary spending on highways, bridges, ports and mass transit. Perhaps more importantly, we now have the Millennials, in far bigger numbers, in the same relative position that we Baby Boomers were in the early 1980s. The decade of the 2020s can indeed become something truly special.

Any potential hurdles?

But to throw a splash or two of cold water on all this optimism, Year 1 is always followed by a Year 2. The twelve months that began in August 1983, delivered only a 2% return for stocks, with two interim 10+% corrections. The comparative for 2010-2011 was pretty darn good with a 15% advance but one had to endure an angst-inducing 15% interim decline to take full advantage. Year 2s are a grind. One step forward, two steps back. Two steps forward, one step back. For all 11 bull markets, the average gain was 12% but with an average intra-year fall of 10% somewhere along the way. The news gets better and better, generally, but there are enough potential hurdles to cast more than a little doubt about the eventual outcome.

What’s causing this doubt?

We can all see three proximate causes for bouts of that doubt, 1) a resurgence (if so, hopefully one final) of COVID-19, slowing down the economic re-acceleration that is now clearly obvious and could well result in the fastest year of GDP growth since WWII, 2) an early onset of inflation, causing the Federal Reserve to pull back on the massive monetary liquidity the economy still badly needs, and 3) the making of the legislative sausage around infrastructure proves too complicated for 2021 and possibly even 2022. I personally don’t believe any will have anything more than a brief, transitory effect, if they even occur at all. But even just the potential for each may well induce one or more temporary declines in stock prices.

March demonstrated that Wall Street is already adapting for a Year 2. Those seeming divergences in sector performance as discussed above represent in my opinion an early return to ‘high quality’. Dividend growth and ESG** are likely to be strong relative performing investment thematics. The returns for Small Cap and Emerging Markets stocks will be far more differentiated, so therefore one can’t just throw money at an index ETF. Active asset allocation and active security selection within asset allocation will become far more important.

We look forward to your questions and comments.

*I believe one’s individual economic acceleration impact occurs generally in one’s early 30s and last for perhaps 20 years. You don’t necessarily slow down in your 50s – your impact just stops accelerating. 80 million Baby Boomers hit their early 30s in massive droves starting in 1980. 84 million Millennials are now doing so. The Baby Busters (born 1965-1979) were as individuals just as effective – there just weren’t enough of them.

**Environmental, Social and Governance – three key factors that are now shown to have a demonstrable positive impact on economic returns, in addition to being ‘doing what’s right!’