Current Bull Claims Title as Longest on Record – Market Notes 8/22/18

Despite ongoing financial stress emanating from the likes of Turkey and other emerging market economies in recent weeks, the US stock market (S&P500) managed to finally inch above the prior all-time highs set back in January.  If that alone doesn’t speak to how resilient is the US stock market, it is also worth mentioning the political environment remains extremely challenging for Trump & Co., and by all expectations would signal that mid-term elections in November will result in a shift of control in Congress.  Such an outcome would seem likely to further reduce what is already limited political capital for the balance of his 4-year term if not create increased uncertainty of impeachment.  At the same time, weakness in international markets implies the globally synchronized growth story is dead just 12 months after it was first embraced and international was believed to be a better value and return opportunity.  Most discussed this week however is that the current bull market being enjoyed in the US just became the longest such run in history, stealing the title from the 9.5 year period encompassing October 1990 to March 2000.  This current run is not yet as powerful in terms of gains as the former, but make no mistake that the age of this run will be more loudly cited as one of the most compelling reasons to anticipate its end.

From an economic perspective, data in the US continues to support the view that there remains plenty of fuel in the tank for the bull to endure.  2Q earnings season just concluded with another robust +24% growth over the year-ago period – on top of a similar jump reported during 1Q.  Employment statistics also evidence strength, and business confidence is back near all-time highs.  Likewise consumers, especially the most affluent, are feeling flush judging by strong results of high-end and aspirational brand retailers.  New, high-end homes are also continuing to sell well, despite mortgage rates that are noticeably more expensive than a year ago.  With such strong readings however, come a different set of worries (odd as that may seem on the surface): financial markets are just as focused on “what’s next”; steady strong growth is not the same as accelerating growth and in that respect a rising caution will be that current growth enjoyed is as good as it gets.  The next progression of that thought is that growth must begin to taper off.  The concern is more succinctly stated as “peak growth”.  Look no further than Europe to understand how “peak growth” can be awkward for investment markets.  Most regions in Europe are still expanding, but growing at a slower pace than in the recent 18 months.  Tariff/trade threats are not helping international investors either.

Careful that this update is coming across as too bearish, it is important to plainly state that we are not calling for the conclusion of the current bull market.  As is obvious from the above, we are well aware of the present worries and risks.  But our focus will always be on fundamentals rather than seasonal or historical records.  In that regard, the old age of the bull market is noteworthy, but not what will determine when it ends.  [Not to mention that its official age is debatable since the current bull was nearly interrupted in 2011 when it skidded -19.4% – and more than -20% on an intra-day basis.  Why wasn’t that sharp decline deemed a “reset” the same as the -19.9% drop that marked the 1990-2000 bull’s beginning did?]  If anything, the obsession about the length of this cycle says more about still-skittish investor psychology than about the market itself.  More important that time is that no recession has ever begun when corporate earnings were still growing.  More important is that economic growth and business confidence remain high.  More important is that the Fed does not get ahead of the market (tighten too far) or what inflation expectations justify (flat yield curve is the signal that it may be close to committing a mistake here).  More important is that oil prices, which are like a tax, do not cause consumers to retrench.  Fundamentals will signal the end of this cycle.  Unfortunately however, most will be revealed in hindsight.  From where we sit, adopting a more cautious tactical allocation against this current collective backdrop is appropriate; but attempting to time the market by moving to cash or abandoning long-term investment objectives is not.  Still, the simple fact that most investors are so aware of the risks facing them may be one of the most compelling reasons that we are not yet at the “top”.

Posted in Blog Post.