Butler: Bulls, bears and one ‘Fearless Girl’
Staring defiantly in the path of a charging bull, there’s a new symbol — a young girl — on Wall Street these days. “Fearless Girl” has gained national attention since the bronze statue was installed in March to honor National Women’s History Month.
The iconic bull, of course, represents bull markets. The permanence of the sculpture, we could say, represents the entire period from 1900 until today, as the Dow Jones industrial average has climbed from 50 to more than 21,000, so it has relevance to long-term buy-and-hold investors.
If the bull was meant to represent just periodic rising markets, we would be continually trotting it back and forth between a warehouse and Wall Street. Leaving it there during a crash would be an embarrassment. “Fearless Girl,” on the other hand, can stay there indefinitely.
The latest issue of Morningstar magazine has an article titled “The Anatomy of a Bull Market.” Following it, coincidentally, is an article titled “Investing in Firms with Female Leaders.” First, based on a study of the market over the past 90 years, the average bull market lasted 8.1 years, with an average return of 387 percent. The average bear market lasted 1.5 years, with an average loss of 35 percent.
The study included various aspects of bull and bear markets, but the most important were “velocity” and “source of return.” Velocity is the length of time exhibited by bull and bear markets and the average annualized rate of return per year during each period.
Ten of the 12 bull markets since 1903 had average annual gains greater than 15 percent. Annualized losses in 10 of 11 bear markets exceeded 15 percent, but keep in mind that the period was only for an average of 1.5 years. Bull markets, with their 8.1-year average run, racked up annual returns averaging more than 15 percent.
At first glance, we might attribute these impressive returns to be a reflection of companies in general that have prospered and grown over the years. However, it’s not that simple.
Gains are driven by inflation, dividend yield, earnings growth and valuation changes. Inflation, for openers, has nothing to do with adroit management skills, productivity gains or inventiveness. It’s just the rising tide that raises all the ships. As dollars become cheaper, the assets that companies own become worth a greater number of those less valuable dollars.
At the same time, companies can raise their prices, and more income (in dollars at least) falls to the bottom line. It may not be “real” income, as inflation for a short period in the 1970s exceeded 18 percent per year. Some bull markets attributable to inflation involve just treading water, rather than a healthy expansion of inflation-adjusted value.
Dividend yield is the amount of profit that gets distributed and reinvested, which counts, of course, as stock market gains. Earnings growth is real, as companies increase productivity and perhaps benefit from falling interest rates that they have to pay on borrowed money. Those two factors alone account for the bulk of the gains we have seen since the recent crash. With inflation very low, the gains in value and record profits have been real.
Finally, valuation changes (increases) reflect the fact that investors think companies will continue to grow into the future. They will pay more today than the stock may be worth based on present profits if the prospects for profit growth are strong. Current price/earnings multiples are at historic highs today for this reason.
Since all bull markets turn bearish, sooner or later, where does that leave the “Fearless Girl” in our calculation?
One theory holds that firms led by women and that have more women on their boards and in management perform better overall when compared against the general corporate population. Women have been shown to make safer, less impulsive decisions than men.
Gender-diverse companies could prove to represent the next “safe port in the storm.” Dialing up “Gender Diversity Index” on a search engine will bring you to sources of information on this new investment product, which reflects a sign of the times.