Lately there’s been a lot of talk about the possible end of our current bull market, and with the investment markets coming off several years of good performance it’s no surprise that investors are beginning to wonder if this cycle is nearing an end.
Moreover, as we assess the latest data there is reason for concern. Earnings growth has slowed, U.S. economic growth remains sluggish, and international economic growth appears to be weakening. Nonetheless, there’s also reason to be optimistic. The jobs data, although more lackluster than the headlines, has been stable, and both interest rates and inflation remain historically low.
So here we are, once again, with a handful of negatives and a handful of positives, and left wondering which hand is more significant. The dichotomy is also notable when one considers the ongoing conundrum of a healthy stock market in one hand, and an anemic economy in the other. It’s this same dichotomy that has caused many investors to be excessively cautious over the past five years.
Yet, a couple of interesting historical points to keep in mind is that bull markets almost always end with recessions caused by robust economic growth, and contrary to what many think, below trend economic growth tends to lead to reduced recession risk, not higher risk.
Furthermore, as you consider the data points that tend to derail bull markets it is clear that todays slow economic environment isn’t the typical bull market slayer. That’s not to say the market won’t experience a pull-back, or that the cycle won’t end soon – it’s just highlighting a historical fact. So, what are the dynamics that typically end bull markets?
From a historic perspective over the past 100 years most every (90%+) bull market cycle has been ended by recessions brought on by strong economic growth combined with an abundance of optimism, rising short-term interest rates, and inflation.
So, the big question is, will our present cycle end with a robust economy? If the answer is yes, then one could assume that this particular bull market cycle may have more room to run, since we still seem to be a long way from a healthy growth environment combined with optimism and inflation.
However, with that being said, there’s actually reason to doubt that our present bull market will end with robust growth as most do. The fact is, the environment that sustained our current bull is unlike any other in modern market history. Unprecedented Fed intervention is one of the most prominent characteristics of the past five years, but also extraordinary is that economic growth rates have been far shy (about half) of the average U.S. economic recovery.
With this in mind, a strong case can be easily made that our current bull market cycle may end in a manner that is more of an outlier than the norm.
Moreover, if we study the times in market history when bull markets were ended by something other than recession what we find is that a stock market sell-off causes the economy to slip into recession. Which is clearly the exact opposite of the historic norm, where the economy slipping into recession causes a stock market decline.
Given this, it’s likely important for investors today to not only be focused on economic indicators for signs of the next recession, but to also recognize the higher than average probability that this bull market may be one of the historical anomalies that’s ended by an outlier event.
What this means for investors is that we remain in an unusually difficult environment where both recession risks and outlier risks should be monitored as equally important. For most individual and professional investors alike that’s a lot to consider.
At Leahy Wealth Management Group we remain focused on the same major risk factors we’ve been tracking for years. They are:
- Recession Indicators
- The Fed
- Earnings Growth Rate
- Market Sector Extremes
From a recession forecast perspective, we are not seeing signs of recession within the next 3 to 6 months. As for The Fed, we view their policy actions today as a slight negative, but would not be surprised to see a change if market weakness set-in. Earnings growth is also a slight negative, and our Market Sector Extreme is presently neutral.
As you can see our risk factors are not exactly exuding confidence, but are also not providing an indication to act. Given this, we are not advising clients to reduce equity exposure today. That may change in the near-term, or it may remain in place for years, but we are presently advising patience.
Scaling back equity holdings today seems to also ignore the punishment the Fed has delivered to overly cautious investors over the past 5 years. As we’ve discussed many times since the financial crisis, the Fed is the primary factor in today’s markets, and significantly scaling back equity risk exposure with a Fed so willing to spur the markets has been a losing trade for most.
Considerations for the Months Ahead
As you read market forecasts please be mindful that both the bullish and bearish Gurus have been dreadfully wrong since 2009.
The bulls were wrong because of their continuous call for healthy economic growth just on the horizon, and the bears were wrong because of their continuous call for an impending collapse, and both sides thoroughly missed the Fed’s impact on the stock markets.
In the end, the best advice is to tune out the drama that the permanently bullish or bearish strive to induce.