When will this bull market end?
The hardest question that someone like me gets isn’t “when will they cut interest rates” or “am I worried about the level of debt out there?” No, the toughest question to answer is: “When will this bull market end?”
Its importance is critical to the wealth of investors, self-funded retirees and all the listeners and viewers in the media outlets where I appear. So I hope to hell my analysis is on the money.
Getting the answer right has both capital gain and capital loss implications. If I guess too early and get everyone out who believes me, then they suffer capital loss from a market that keeps creeping higher, while they sit safely in cash, with a 1.0% return if they’re lucky.
Of course, they could play around with hybrids at slightly higher returns but these could be problematic if the next crash is especially nasty on bank balance sheets.
The current bull market has been going on since March 2009 (or 10 and a half years). And because the average bull market in the US is only nine years, there have been many experts tipping that the bulls are on death row, awaiting the arrival of the bears.
The big slump in stocks in the second-half of last year increased the numbers out there tipping the day of reckoning for long stock players. Last year, the US market nearly went down 20%, which would have meant Wall Street had moved into a bear market but that bullet was dodged. Our S&P/ASX Index was only down about 14% last year, helped by the rise in iron prices because of the problems Vale had with its tailings dam. Their issues boosted BHP and Rio, which, along with a falling Oz dollar, supported our stock market.
Recession fears and how a recession can trigger a stock market collapse were heightened this year as the yield curve in the bond market inverted. This is seen as a good but not perfect indicator that a big economic slump is near. Donald Trump’s trade war has also left the global economy exposed to a big slowdown. And tariff escalation concerns increased worries about a stock market and economic slump in 2020.
All the above have put a lot of people on “escape stocks before it’s too late” alert.
But back to the data on bull markets…
While average bull markets last less than 10 years and we’re above the average in duration terms, the average bull market goes up 480%. The more bullish US bull market is actually only up about 310%, though it looks bigger on a chart, so we might have some time left based on that historical statistic.
Also, history could be on our side for the following reasons:
• The bull markets of the 1980s and 1990s lasted 12.8 and 12.9 years respectively and rose over 800%!
• The longest bull market was in the 1950s and that lasted 15.1 years.
• Most bull markets die on rising interest rates and the current outlook for interest rates is more down than up.
• Never before have I seen central banks act to stimulate before a serious economic slump was clear cut. These bodies are often slow to act and their tardiness actually made the GFC worse than it needed to be.
• Helping optimists is the fact that the third and fourth years of a US Presidency are the best for stocks.
In fact, according to Ned Davis Research, since 1946 the S&P 500 has gained a median of 18.4% in its third year.
S&P 500: The gain looks huge
The last low point on the chart (before the Index started rising) was roughly December 2008.
All the above say it’s not too risky to still be in the stock market. And with positive messaging about a phase one trade deal coming out of the White House as the Fed continues to cut interest rates, there are more reasons to stay long stocks for the time being.
There are also those arguing that impeachment talk for the US President means the White House will be keener to ensure the US economy rebounds in 2020 ahead of the November election.
One character I have to introduce you to is Tom Lee who is a Managing Partner and the Head of Research at Fundstrat Global Advisors. Before that, Tom was J.P. Morgan’s Chief Equity Strategist from 2007 to 2014 and previously, Managing Director at Salomon Smith Barney.
As you can see, this guy has credible form. In early 2018, he told CNBC: “Both [Fundstrat technical strategist Rob Sluymer and I] think it’s more like 2029 is the peak of this equity market cycle and then, the S&P is 6000 to 15,000.” I wrote at the time… “what is this guy smoking?”
The historically low and never-seen-before interest rate situation creating a never-seen-before bull market is effectively what he’s arguing. And while I think it’s a huge call, the possibility of this bull market going on longer than expected can’t be discounted.
I worry about the level of global debt, computer/algorithmic trading and weird geopolitical events and leaders who could send a ‘black swan’ or unexpected development that would KO confidence on financial markets. That’s why I’m more worried about 2021 for a stock market crash than 2020 and my concerns could easily creep to 2022 for a crash, for the following reasons.
- I presume there’ll be a Trump victory with less trade war concerns, which will take the stock market up, pushing it closer to an overvalued level.
- The IMF forecasts for the US economy goes like this: 2.5% for 2019; 1.7% for 2020; and 1.6% for 2021.
- The first and second years of a US Presidency, which will be 2021 and 2022, are the worst for stocks.
- The global economy is expected to grow faster and interest rates should be starting to rise, which could cause trouble for bond markets after years of unbelievably low interest rates. That could then rattle stock markets.
- A black swan event could easily materialise by 2021 or 2022.
So on the law of averages, it pays to be on the lookout for signs of some evolving unusual trends, which might be forerunners of a major shock that will send stocks plummeting.
Frankly, markets are overdue for a pullback, with our market alone up more than 23% this year. But we are living in historically weird, wild and wonderful times! I’m more relaxed for 2020 because of the positive developments on the trade war front and the fact that the Fed is still prone to cutting interest rates, but I will be more forensic in 2021 and even more in 2022.