Investors have the impression that bull markets are days of wine and roses.  However, nothing could be farther from the truth.  Bull markets are periods of fear.  This fact becomes quite obvious when one examines the valuation and sentiment data associated with the 1982, 1990, 1995, and 2003 bull markets.

The current bull market, which began in March 2009, seems to be fitting the historical precedent.  The S&P 500 has appreciated well over 100% from its trough, yet most observers are hesitant to concede that the US stock market is in a bull phase. Individual investors are still searching for protection, and ignoring the fact that equities have appreciated significantly more than the fixed-income yields for which they search.  Institutional investors are still looking for "absolute returns" and paying high fees to alternatives managers instead of simply buying old-fashioned stocks.

This pervasive hesitancy to invest in US equities despite the asset class's significant performance further cements our bullishness regarding the asset class.  Bull markets typically end with over-enthusiasm, and not the fear that is so prevalent today.


Our Wall Street Sentiment Indicator clearly shows the extreme level of investors' fear.  The survey, originally crafted in 1986, is a survey of Wall Street strategists' recommended equity allocation for a balanced fund.  Extreme readings (i.e., one standard deviation above or below the long-term norm) have historically been reliable sell and buy signals, respectively.

Chart 1 shows the Wall Street Sentiment Indicator with "buy" and "sell" signals.  The current reading, the lowest suggested equity allocation in the indicator's history, certainly meets the requirements of a "buy" signal.  Investors appear historically scared of equities.

Chart 1:

A second version of the Wall Street Sentiment Indicator shows the survey data relative to the traditional 60-65% "normal" equity weighting used by most investors.  This chart highlights that all Street never suggested overweighting equities during the entire bull market of the 1980s and 1990s.  In other words, equities were never the asset class of choice throughout the entire bull market.  They become the asset class of choice, i.e., Wall Street suggested overweighting equities, in the early-2000s, which was just in time for the so-called "lost decade in stocks". Equities are certainly not the asset class of choice today, which is a typical sentiment during bull markets.

Chart 2:

When do bull markets end?

Bull markets typically end when valuations are extreme, the Fed is tightening monetary policy, and investors are over-enthusiastic about potential equity returns. Valuations are quite attractive given that the 10-year t-note yields roughly 1.5%.  Investors are very leery of equities, and equities are no longer the asset class of choice.  The Fed's most recent round of easing has spurred the economy further, and a tightening of monetary policy seems far into the future.

The opportunity cost of fear has been very high.  Both institutional and individual investors have largely missed out on a doubling of the US equity market.  If this cycle continues to follow historical precedent, as it has done so far, then investors will eventually try to play catch-up, and fund flows will likely turn decidedly positive.

The bull market seems to be a very typical one and, like past cycles, is based on fear.  This bull run may still be in its early stages despite being forty-two months old.

 Richard Bernstein is chief executive officer of Richard Bernstein Advisors LLC, a multimarket equity strategy subadvisor of Eaton Vance Management. Rich has over 30 years of experience on Wall Street, including most recently as chief investment strategist at Merrill Lynch & Co