Wed, JUN 11th, 2014
How long can this bovine run?!
Many ask with anger, other with glee — but regardless of tone it is a question that many investors, analysts, and pundits have been hotly debating.
Let’s drive right into it.
Duration and absolute market level are poor predictors of market tops, and bull markets typically do not end when the economy is picking up steam, the Fed is (still) very accommodative, and when valuations are sensible (particularly with interest rates so low and inflation tame). More specifically on the latter, bull markets rarely rollover simply because stocks are at fair value or even somewhat overvalued (if you believe that we are, which I do not).
On the economy — the foundation for sales and earnings and thus stock prices — I can understand why it may feel as though we are getting a bit long in the tooth. Indeed, by the end of the month this recovery will officially turn 5 years old. Many folks on “Main Street” would probably be surprised to hear that statistic! Either way, my view is that the macro landscape still looks favorable for the foreseeable future, and people are now actually starting to feel this recovery. It is from the gut of the average household that true economic momentum is borne.
But let’s not get a head of ourselves here. For a variety of reasons this economic recovery has been sluggish and below the longer-run trend (~2.2% annual GDP growth vs. ~3.5% post-WWII avg.). And while I certainly recognize this fact, an unhurried pace can be both good and bad. On one hand it is bad because it means slower job creation. On the other (sorry Harry), it can be good because it likely means is that this will ultimately be an eight-ten year business cycle as opposed to the more typical four-five year cycle (again, we are currently at year five this summer). My operating assumptions are that the Yellen Fed probably won’t tighten enough (nor soon enough) to risk recession with broad labor market slack indicators still at elevated levels. Some of these broader measures of labor market slack — like U6, long-term unemployed, tepid wage growth, low employment/population ratios and labor participation — still suggest a road ahead in terms of reaching equilibrium. So we should have a few more years of improvement to go and thus the business cycle in front of us (as employment is critical to that virtuous economic cycle).
And this is important stuff.
History tells us that the condition of the macro economy is vital when asking our original question. Consider this. Long-run stock market data demonstrates that when bull markets pass the five year mark (which this one did in March) only recession ends its advance: according to strategists at RBC, seven of the last eight bull markets ended at the onset of a recession. While it is true that history doesn’t always repeat itself, it does often rhyme.
For now, from my perch the stock market remains underpinned by the economy & earnings, low inflation, low interest rates and reasonable valuation. I see no reason this market shouldn’t continue to move higher — save for a black swan, which by definition means we cannot predict when/if this would occur.
Finally, like so many things a market cycle’s duration is relative and requires context. From a cyclical bull market point of view, yes, a five year bull run is getting pretty mature. From a secular bull market point of view, however, five years is about the middle-innings of the cycle’s advance. Presently, my fundamental take on the state of things is that we are likely under the influence of the latter (secular bull market). Specifically, I believe that the 2003-2007 rally and the 2009-2012 rally were cyclical bulls inside of a broader thirteen-fourteen year secular bear (the “lost decade(ish)“, as it were). This secular bear’s duration falls about in-line with over 130 years of stock market data (the mean being approximately thirteen years). On the flip side, secular bull markets (the last one endured for eighteen years ending in early-2000) historically last about about twelve-thirteen years. If I am right and we are indeed under the spell of a bullish super cycle up we may have years to go yet. This obviously won’t be straight up, but I do think the trend is higher still until one or more of my fundamental pillars crumble.
To be sure, sentiment (folks still skittish and under-invested), the economy (still recovering and trying to get its legs) and the alternatives (poor return prospects on bonds and cash) all augur for ample headroom in the stock market. Rally’s do not end simply because they get tired. And on market mood, remember what the late great Barton Biggs once told us: “Bull markets are like sex. It feels best right before it ends.” Investor euphoria and apogee just are not at that level yet.
Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200