Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 249

End-of-cycle and riding an ageing bull

My first boss and mentor always knew when it was going to rain. He would stand up from his desk, stretch an aching leg, and declare that a thunderstorm was coming. He could “feel it in his bones.” Today the received wisdom in the market, especially from investors with a little grey hair and barometric bones, is that we are in the final stages of the bull market, one that has now become the second longest in history. At some point in the not-too-distance future, the “correction is coming”.

What a bull market it has been

From its lows in 2009, through to the end of March 2018, the MSCI All Country World Equity Index (MSCI ACWI) has risen by 227% in US dollar terms, equivalent to an annual rate of return of 13.9%. The biggest driver of gains for global share markets has been the returns delivered from the US, with the S&P 500 index increasing by 311%, or 16.8% annualised. In turn, the biggest driver of US market returns has been the gains in the technology sector. The NASDAQ, an index dominated by US technology stocks, has increased by 552%, equivalent to an annualised rate of return of 22.9% over the last nine years. These gains have happened against a backdrop of near-zero interest rates in almost all the world’s developed market economies (Australia and Canada two notable exceptions). The opportunity cost for an investor who has stayed in cash over this period has been extreme.

Such equity market returns are not sustainable over the long run. It is a brave investor who assumes equity market investments will deliver double-digit returns over a full investment cycle. Over the past 30 years, the annualised returns of the S&P500 and the MSCI ACWI have been just 5.4% and 5.2% respectively. It’s understandable why investors who have lived through a few market cycles have a gnawing sense of unease about how easy it has been to make money in recent years.

The challenge investors face today is how to approach markets when history suggests we are closer to the end than the beginning of the current cycle. On most conventional measures, equity markets look expensive, the current P/E of the S&P 500 at 21.4 is comfortably above its long-term average. Corporate debt levels have increased considerably. High price to earnings valuations are justified when interest rates and inflation expectations are low as discount rates are lower. High debt levels are sustainable when borrowing costs are near all-time lows. Both positions however, rely on interest rates remaining low to support the status quo. However, financial imbalances have built-up in the decade since the financial crisis, and most economists and central bankers do not believe such low interest rates are sustainable in the long term. 

Forecasting: the art of saying what will happen, and then explaining why it didn't

Consensus, even if it’s true, doesn’t give us much to work with. Forecasts are easy. Being in the ‘final stages’ of the current bull market could mean markets are three months or three years from their pending highs. In December 1996, amid a market rally similarly driven by technology stocks, Alan Greenspan, then Chairman of the US Fed, famously opined that markets had become irrationally exuberant. Few people would have disputed Mr Greenspan’s assertion that markets were expensive at the time, however markets continued to rally for a further four years, rising 116% in the process. Secondly, history suggests that the final stages of a bull market often generate the greatest period of returns as caution gives way to euphoria. Exiting now may lead to missing the great returns that are still to come.

Finally, as was the case in 1996, we are currently living through a period of immense technological change, one that most traditional investors (myself included) do not fully understand. Companies like Google, Amazon, Uber, and Tesla have radically changed well-established businesses landscapes in just a few short years.

Here’s a remarkable and recent example: Researchers working at the artificial intelligence (AI) unit, DeepMind, created a game-playing AI program called AlphaZero. In the space of just four hours, AlphaZero taught itself to play chess and then went on to decisively beat Stockfish, widely regarded as one of the world’s strongest chess engines. These sorts of advancements tell us that serious changes are underway to both the jobs market and the business landscape, changes that will both create and destroy considerable value from an investment point of view.

Checklist for the end of the cycle

The two most important things investors control are their investment horizon and their risk tolerance, and both these parameters should be set by individual circumstances, not the market cycle. Putting that aside, below is my checklist for investors trying to navigate the final stages of a bull market.

  • Be disciplined and rebalance. We all have winners and losers, and after a 9-year market run it would be unsurprising to find individual investments within a portfolio that have done remarkably well. The path of least resistance is often to let these positions continue to run. Be sure to ask yourself if you would put them on again at their current size today.

  • Adjust for volatility. The final years of a bull market are often the most volatile, but as risks increase so do the potential returns. An increase in volatility acts like a form of leverage, and your actual investment exposure to the market in dollar terms can increase without a reduction in the amount of money you have invested.

  • Forget timing. One of the great fallacies of investing is the idea that it is possible to time markets with any real precision. Far more important is to match what you want from your investment portfolio to your investment horizon. If you were 25 when 2008 struck, what happened to the shares in your super fund will be distant noise when you come to retire. If you were 65, it was a different story.

  • Technology. Tech stocks are the defining characteristic of this cycle. Disruptive technology clearly creates problems for many established business models, but in aggregate, it should be positive for equities over the long run. New technologies are dramatically increasing the productivity of existing capital and putting more money back into the hands of consumers to save or spend. The pace of this technological change is unlikely to correspond neatly to any historical expectations we have about how long a bull market should last.

 

Miles Staude is Portfolio Manager at the Global Value Fund (ASX:GVF), which he manages from London. This article is for general information purposes only, as it does not take into account anyone’s individual financial situation.

 

RELATED ARTICLES

Forget picking the bottom and focus on value

Suddenly, the market cares if a company makes money (again)

7 truths of volatility, but are they friends or foes?

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Latest Updates

Taxation

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

7 key charts on the state of the Australian property market

The Australian property market stirs fierce debate - often bullish optimism versus crash predictions. But beyond the noise, seven charts reveal what's really driving prices and the outlook moving forward.

A simple alternative to the $3 million super tax

Division 296 aims to introduce improved fairness into the superannuation system, yet is overly complex. This scours the world for better ideas and suggests a simpler alternative which can achieve the same goals.

CBA and the index conundrum for super funds

After the hyperbolic rise in CBA shares, super funds are floating the idea of carving out the weightings of ASX bank securities and indexing them within their portfolios. This looks at why that might be a big error.

Strategy

10 policies to drive Australian productivity higher

Here's a comprehensive list of proposed reforms to fix Australia's stagnating economy, including introducing a flat income tax rate, reducing migration, and making childcare tax-deductible.

Interviews

Where to find big winners in Asia

As more money looks for a home outside the US, Asia may soon get some love. Fidelity's Anthony Srom outlines the best places in Asia to invest, including in Chinese consumer names, Indian financials, and Thailand.

Investment strategies

We have trouble understanding the time value of money

We overvalue the present and underestimate the future - it’s a cognitive glitch called hyperbolic discounting. It affects savings, spending, and loans, and it's more common - and costly - than we think. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.