Last weekend marked the second anniversary of the current bull market in equities. Since hitting its low point on October 12, 2022, the MSCI All Countries World Index has surged about 50 percent, the S&P 500 has risen by around 75 percent, and the Nasdaq has doubled. The driving force behind this impressive rally? The so-called “Magnificent Seven” stocks, which have nearly tripled in value over the same period.
At just two years old, this bull market is still in its early stages, which could mean there’s more room to run. The longevity of any bull market typically hinges on rising profits, which usually track economic growth. Only during recessions do profits typically take a hit. Predicting recessions is notoriously difficult—perhaps even more so than predicting stock market movements—but historical patterns of bull markets offer some clues.
Bull markets fueled by productivity growth tend to last the longest and yield the highest returns. Take the roaring 1920s as a prime example. Over about eight years, the Dow Jones Industrial Average surged 500 percent. This massive jump in stock prices was driven by a significant rise in profits, thanks to productivity gains of more than five percent annually. These gains came from advancements like mass production, widespread use of electricity, and the internal combustion engine—hallmarks of the Second Industrial Revolution. It was an era of automating human muscle power, with clear results in agriculture and manufacturing. Despite the robust economic growth, inflation remained in check, largely due to these productivity leaps.
Wirtschaftswunder
The post-World War II period brought another echo of the 1920s bull market. The Great Depression left many investors wary, but the so-called “Consumer Bull” of the 1950s (from 1949 to 1966) is worth noting. This boom was driven by post-war reconstruction, notably in Germany with its “Wirtschaftswunder,” and the broadening of prosperity. Starting from a low economic base, growth soared as new technologies from the Second Industrial Revolution and wartime innovations took root.
Fast-forward to the 1980s, and we see a bull market largely driven by falling interest rates. Following the inflationary struggles of the 1970s, stock valuations were low, and when interest rates began to decline, the market took off. Of course, greed eventually outpaced caution, leading to the infamous 1987 crash. Interestingly, during the 1980s, long-term bonds outperformed stocks overall, though that’s another story.
Then came the dotcom bubble. The crash of 1987 was followed by the longest bull market in history, culminating in the late 1990s tech boom. This too was a productivity-driven market, powered by the rise of the internet. Once again, productivity growth kept inflation low despite a strong economy, reminiscent of the roaring twenties. Federal Reserve Chairman Alan Greenspan later admitted that he had expected to raise interest rates more often in the 1990s, but each time, productivity gains kept inflation under control.
Productivity boosts
The current bull market owes much to the “Magnificent Seven” and the anticipated productivity boosts from artificial intelligence. While the Second Industrial Revolution was about automating muscle power, AI represents a leap in automating brainpower. The implications are vast, extending beyond manufacturing to services, which dominate the economies of many developed nations. The potential for productivity gains here is greater than what we saw with the introduction of the iPhone, personal computers, or even the internet. And unlike past innovations, AI is being adopted at a much faster pace.
This bull market mirrors that of the 1990s in other ways, too. In the early ‘90s, we saw a bump in interest rates, followed by a soft landing for the U.S. economy in 1995—the only time in history when rate hikes weren’t followed by a recession. Inflation was less of a concern back then than it is today, but the parallels are striking.
Given the transformative power of AI, we may just be witnessing the early stages of a bull market that could rival the one from the 1920s. If history is any guide, the current rally might have a lot more room to run.
Han Dieperink is Chief Investment Officer at Auréus Asset Management. He previously served as CIO at Rabobank and Schretlen & Co.