The bull market recently celebrated its 10th birthday. Can it rally for another 10?
It might seem premature, even ridiculous, to ask such a question now. The S&P 500 index (.SPX) is still 1.3% off its all-time high of 2930.75, despite gaining 2.1% to close at 2892.74 this past week.
Yes, that could mean the market peaked last September and the bear market has already begun. After all, the yield curve inverted just a couple of weeks ago, and that has been a near-perfect sign of a looming recession. And just the fact that we’re asking the question—on the cover of Barron’s, no less—could be a contrarian indicator signaling that the market has truly topped.
Or maybe not. We’ve heard it said many times before, but it is worth repeating: Bull markets do not die of old age. Since 1949, the average one has lasted five years and four months, according to Yardeni Research data. The longest ran from 1987 through the dot-com peak in 2000 and lasted more than 12 years; the shortest ran from 1966 to 1968 and lasted a little more than two years.
So much bearishness rests on the fact that the current recovery has lasted for more than 10 years. “People are superstitious because the bull market has been running so long,” says Andersen Capital Management’s Peter Andersen. “Their intuition says it doesn’t seem like it can last much longer.”
Even from its inception, few have really trusted this bull market. Every rise, fall, and period of stagnation has been cited as proof that the bull market is on its last legs. Bears warned that the bounce off the market’s bottom in 2009 was a head fake; the S&P 500 finished the year up 23%. During the European debt crisis in 2011, the S&P 500 dropped 19.4%—almost meeting the threshold for a bear market—before closing the year flat.
The market’s 328% rise since its 2009 bottom is often presented as occurring in a straight line. Yet there has always been a reason to sell and always a reward for holding tight.
That will certainly change at some point—just not yet. Yes, the yield curve briefly inverted, but even some investors who remain cautious on the U.S. market warn against reading too much into it. If it tells us anything, it’s just that “something that had been benefiting from loose monetary conditions is finding it harder,” says Michael Shaoul, CEO of Marketfield Asset Management. “As far as the U.S. economy is concerned, there is no obvious sign that it has deteriorated.”
Recent economic data seem to support that point. This past Friday’s payrolls report showed that the U.S. added 196,000 jobs in March following a disappointing February. Recent manufacturing surveys suggest that the economy continues to grow, even if at a slower pace than 2018’s peak. “Hardly any economic indicators show that there will be a recession,” Andersen says.
Or that the economy is overheating. The Atlanta Fed’s GDPNow model predicts 2.2% growth during the first quarter of 2019, near the annual average of 2.3% since 2010. Capital spending still hasn’t reached levels seen during previous recoveries. Inflation is still muted. As long as that remains the case, there will be no need for the Federal Reserve to tighten the U.S. into a recession.
And who knows how long that might be? Barron’s spoke to three strategists, each with his own reasons for continued bullishness.
Thomas Lee, Fundstrat Global Advisors
Ask nearly anyone, and they’ll tell you that the U.S. is nearing the end of its economic expansion. Not Thomas Lee, head of research at Fundstrat Global Advisors. He believes that we’re only halfway there.
How is that possible? The labor market is one reason. Some would point to the near half-century-low U.S. unemployment rate as a signal that the labor market is running out of slack. Lee points to the ratio of employed people to the entire U.S. population—about 60%—as a reason that the labor market can continue to improve. In past economic expansions, that measure has gone as high as 64%, he says, suggesting that there’s more runway for Americans to re-enter the workforce and keep filling open jobs.
Lee also sees a continued recovery in investment and capital spending driving gains in coming years. U.S. private investment (the sum of capital expenditures, durable-goods spending, and residential investment) currently sits at 24.7% of gross domestic product. In previous expansions over the past 50 years, that ratio has exceeded 27% before peaking. Even more telling is the ratio of spending on fixed assets like factories, homes, and machines to GDP, which at 17% in the U.S. is currently lower than in countries like Venezuela or Afghanistan. Japan and Canada spend 24% and 23%, respectively, on creating new fixed assets.
Finally, the large generation of millennials—those born from 1981 to 1996—are set to boost their spending and investing as they enter their prime earning years of 26 to 50. That suggests this cycle could have even more room to run. “There’s still a lot of gas left in the tank,” Lee says.
That’s not something that people find easy to believe. Even after 2019’s first-quarter rally, Lee sees investor sentiment remaining depressed. Hedge funds are either short stocks or have their lowest exposure in years. “Anecdotally, most of our clients are in the late-cycle camp and cautious on equities,” he says. “One of the reasons that we’re having such shallow pullbacks this year is everyone has already taken money off the table.”
The S&P 500 failed to close at a new high this past week, but Lee expects stocks to keep rallying. He cites some reasons for optimism: the Fed backing off further interest-rate increases, solid economic indicators, and strength in high-yield bonds. The performance of these riskier bonds is highly correlated to stock returns.
Lee has an official 2019 year-end target of 2925 for the S&P 500, but could easily see it heading even higher, to 3100. He cites the U.S. Treasury yield curve’s recent inversion as the reason for his lower official target.
Binky Chadha, Deutsche Bank
Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank (DB), draws a straight line between economic expansions and bull markets. On average, recessions have been associated with declines of about 21% for the S&P 500, according to Chadha.
Besides the simple fact that in July the U.S. will have enjoyed its longest sustained economic recovery since the 1850s—and appears due for a slowdown—Chadha sees only one indicator that’s flashing red on the current expansion.
“Labor markets are tight,” he says. “But in and of itself, that’s not a bad thing.” All of the other potential problems—wage pressures, cost pressures, confidence, corporate leverage, and spending on durable goods—Chadha would characterize as mid- or even early cycle.
While the labor market might be worrisome, Chadha doesn’t see any obvious imbalances in the U.S. economy or financial system that could succumb to a reasonably sized negative shock—whatever that might be—and tip the economy into a recession, as the housing market’s collapse did a decade ago.
In fact, the economy has continued to demonstrate its resilience. Pockets of the U.S. manufacturing economy saw a recession in late 2015, but the broader economy didn’t, and stocks never slipped into a bear market.
One factor that would help stocks is a move away from protectionism, Chadha says. Over a third of S&P 500 earnings come from abroad, and faster-growing business from emerging markets can keep stocks rising, even if the U.S. economy slows. Another requirement is avoiding big policy mistakes, both by the Fed and on the fiscal front.
Chadha hopes to see more investor confidence and participation in equities to keep the rally healthy. “This is probably the most unloved bull market I can think of,” he says.
Global central banks, with their ultra-easy monetary policies, have been “essentially communicating with the public at large that something is wrong with growth,” he says. “And so it’s a clear advertisement not to touch equities with a 10-foot pole.” He has a year-end target of 3250 for the S&P 500.
Dubravko Lakos-Bujas, J.P. Morgan
While many strategists and investors try to predict the end of the current cycle, J.P. Morgan (JPM) chief U.S. equity strategist Dubravko Lakos-Bujas thinks it may be time to reconsider its very existence.
“We are all used to using the word ‘cycle’; we’re all used to looking at historical charts and graphs and equations and relationships,” Lakos-Bujas tells Barron’s. “The reality is that maybe the word ‘cycle’ is no longer even relevant, given that we have so much unconventional central-bank involvement.”
In previous cycles, central banks steadily tightened monetary conditions through a recovery, then eased once a recession appeared. For the past decade, though, central banks around the world have kept policy accommodative. They’ve been able to do so because inflation has remained under control despite low interest rates, Lakos-Bujas says.
“The fact that we’re not seeing really significant inflation pressure—it remains positive but tame—suggests that there’s no reason for central-bank policy to rush,” he says.
But they’ve done more than just keep rates low. Central banks have put their balance sheets to work like never before, with large-scale asset purchases injecting liquidity into economies around the world. The European Central Bank has gone even further than the Fed, buying up both sovereign and corporate bonds. The Bank of Japan took it to yet another level, purchasing equities in addition to bonds.
“This is not a normal cycle just left to itself to run. It is continually fiddled with by these central-bank injections,” he says.
Rather than nearing the end of one decadelong cycle, perhaps it’s just the beginning of a fourth mini-cycle, he says.
The first cycle he identifies ran from 2009 to 2012, when the European debt crisis forced the ECB to be creative in its measures to support debt-burdened euro-zone economies. The next phase lasted until 2016, when some emerging markets slipped into recession and U.S. corporate profits declined for two quarters. It ended when the Fed paused interest-rate increases and other central banks turned more accommodative. Another mini-cycle ended in the fourth quarter of 2018, when the Fed pivoted to a dovish stance and China began fiscal stimulus.
That brings us to the start of 2019, when a fourth cycle might have begun. “We have these little mini-cycles that are continuously occurring, and they seem to coincide with central-bank policy,” Lakos-Bujas says.
He sees the S&P 500 going to 3000 this year, as investors steadily become willing to take on more risk and overhangs like the U.S.-China trade dispute are resolved.
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