Last Christmas, the longest Bull market in our lifetime came within points of dying as the Fed raised interest rates.
Some pundits say that every 3 years or so something pushes the Bull market to the brink of extinction, before a last-minute escape, that there is a record of support that underpins a case for optimism where benefits are felt.
Like now, the S&P 500 just rose for the 9th week in 10 running, ignoring anemic profit growth, and/or the threat of a full-blown global trade dispute.
Against that backdrop is a market whose gain is rivaling some of the best years in decades.
To us Bulls, it is the market celebrating its survival from a trade growth attack, and in some ways, predicting a rebound ahead after the Fed has taken a U-turn to cut rates and weaken the USD.
“The market turmoil and economic slowdown over the past 18 months is not marking the end of the business cycle, but rather represents a reset similar to crises that occurred every 3 years after 2008,” said a strategist at JPMorgan Chase & Co. “As the monetary stimulus acts with a lag, we believe that a cyclical upswing will more decisively manifest itself.”
These crises have have provided support for the adage that what does not kill the Bull market makes it stronger. A couple down years and 6 corrections later, the advance stands as the longest in history as it heads to the end of its 11th year in March 2020
Theories exist as to why this Bull cycle has been so long.
Some credit the Fed, which has repeatedly stepped in to help restore market order. During the Ys 2011-2012 European debt crisis, it started 2 rounds of QE to spur growth. Then 3 years later, equities sold off as it began to raise rates and it halted hikes for a year.
A similar dynamic played out in December 2018, when a 4th rate increase of the year sparked a near-death experience for this Bull run. Then under pressure from President Trump, the Fed did an about-face mid-year and equities are on now track for one of the best annual gainers in 20 years.
“We have mediocre earnings growth. Yet the Fed cut 3 times this year,” said the director of global market research at Boston Partners, which oversees $87-B. “As long as you have that kind of wind on your back, there is no reason that the economic backdrop can’t continue to be supportive for stock prices.”
Some others say that the Bulls are bold now because US GDP is stuck in the weakest recovery since World War II, it feels like the world is on the edge of collapsing and the market is climbing the wall of worry. But while growth has been slow, it has been steady, and declines in corporate profits have been small.
What’s more, nothing in the frame has compared to the Y 2008 meltdown, and not everyone is convinced the market is in clear air.
Over at UBS Group AG, the firm’s model suggests the S&P 500’s expected rate of profit growth over the next 12 months is likely to turn negative in February, followed by deterioration in some leading indicators for manufacturing through Q-2 of Y 2020.
Historically, such a pattern has been associated with market declines that ran at an annualized rate of more than 20% warned a strategist at the bank in an e-Mail earlier this week.
But for now, the Bulls are in charge.
Stocks rose this week as the Fed kept interest rates unchanged and President Trump signed off on P-1 of the trade deal with China. And the S&P 500 has returned almost 30% including reinvested dividends YTD.
Over the past 3 months optimism has gained pace with investors selling defensive shares in favor of those that benefit from a pickup in the economy.
And importantly, the Small-cap stocks have broken out of a 1-year trading range while semiconductor shares defied a profit slump to lead the market. Financial companies this week saw their stocks eclipsing the Y 2007 highs for the 1st time, thus, making a full recovery from the global financial crisis of 2007-2008. Russell 2000 +21.5% YTD
While periodic turmoil and recoveries have helped prolong the expansion, the unprecedented nature is sure to make investors nervous about an end to the cycle, according to an economist and multi-asset portfolio strategist at New York Life Investment Management.
So, even if we have mini cycles, we still have the macro cycle happenings, so it does not mean it will not last for another couple of years, but I have never seen before. Hence, people are prudently hedging their bets.
Remember, alway take what the market gives.
Have a terrific weekend