Today, August 22 is the day the current bull market eclipses the bull run of the 1990s, which on Tuesday, had been the lengthiest bull market in modern history.
Well, if we’re splitting hairs, the S&P 500 Index must pass its closing high registered on January 26 before it can officially be declared the new champ. On Tuesday, it was within about 9 points of closing above its previous high.
While it appears set to become the longest-running bull market, the title for the best performance remains in the hands of the great run-up of the 1990s. You see, the S&P 500 is up 322% since the bottom in March 2009. The 1990s saw a gain from trough to peak of 417%.
Then, there are some folks–purists–who might argue the bear market of 1990, whose peak-to-trough decline extended to 19.92%, didn’t quite meet the true definition of a bear market–a 20.00% decline. For those folks, the bull market that peaked in 2000 began its climb after the 1987 market crash.
Sure, we can argue back and forth on this one, but there is one reality I think most of us can agree with.
Stocks go up and stocks go down. But long term, markets have an upward bias. A disciplined and diversified approach, which is rooted in time-tested investment principles, has historically put investors on a path to meet their financial goals.
Last week, Donald Trump announced new tariffs on steel and aluminum. These are industries he promised to protect in the campaign, and he’s following through. But at what cost?
The vast majority of economists will argue that free trade is a net benefit to the U.S. economy. But a net benefit hides the fact that some people lose. I get it.
Those in industries that face serious foreign competition rarely turn out to be winners. But let’s not discount the benefits of free trade.
Consumers win because they pay less for various goods, and jobs are created in export-oriented industries.
Did you know that last year U.S. exports totaled $2.3 trillion, according to the U.S. Bureau of Economic Analysis? Yes, that’s trillion with a T. It’s not small change.
There are many more Americans that work for U.S. manufacturers that consume steel and aluminum than those who produce the metals.
Think about it: aluminum cans, farm equipment, construction equipment, aerospace, autos and parts, machinery, pipeline makers, and drilling equipment.
Trump has promised energy dominance, but he just created a new hurdle for energy producers that are voracious consumers of steel and aluminum. Not surprisingly, the industry has denounced the new measures.
At the margin, it raises costs and modestly boosts inflation. It could also force some U.S. manufacturers to put projects back on the shelf, move production offshore, or disrupt plans by foreign firms that had considered moving factories into the U.S.
And it doesn’t stop there. U.S. tariffs invite retaliation, pressuring exporters and jobs/profits in globally competitive sectors. The biggest concern: it could spiral into a tit-for-tat trade war.
America is open for business That’s the message Trump resoundingly and unequivocally proclaimed to the world at Davos in January. It wasn’t an exercise in rhetoric; his words were backed by concrete actions.
His administration has launched an assault on regulatory excess. The tax cuts that just passed Congress favor business and production and make the U.S. a more attractive location to set up shop.
He’s now sending the world a mixed message.
At the margin, steel and aluminum tariffs won’t offset his pro-business policies. But unwarranted tariffs may lead to a nasty trade war, which no one wins.
It creates uncertainty for investors, increases prices for consumers, and could harm efficient job-creating sectors that are wrestling market share from global competitors.
Trump has signaled he’s willing to negotiate, but it’s a very risky strategy as our allies may be in no mood to give ground. It’s an exercise in economic alchemy.
Serenity Now! It’s a phrase that Seinfeld’s Frank Costanza latched on to thanks to his physician. As he so eloquently frames it, his “Doctor gave me a relaxation cassette. When my blood pressure gets too high, the man on the tape tells me to say, ‘Serenity now!‘”
“Medical advice” aside, investors have just been given a ring-side seat to a ten percent correction in the S&P 500 Index. Volatility unexpectedly engulfed trading, with the S&P 500 moving into correction territory just nine trading days after closing at an all-time high.
That’s a record, according to LPL Financial Research.
Putting aside Frank Costanza’s questionable medical advice, corrections and volatility are a normal part of the investing landscape. The period of relative tranquility, which began in the summer of 2016, is not. It’s profitable for an investor that is well-diversified, but it can’t be expected to continue forever.
Where to from here? I won’t try to time the market. No one can consistently time the market.
What I can say: A well-crafted financial plan that is uniquely crafted with your financial goals and risk tolerance levels in mind is the best place to begin. Don’t have a plan? A well-regarded financial advisor can assist.
Diversification cannot eliminate risk, but it can help mitigate it.
Advisors who take a long-term view and regularly communicate with their clients have been emphasizing the importance of the strong fundamentals but have also been subtly cautioning clients that market volatility would eventually resurface. Timing it, however, is almost next to impossible.
Resist the temptation to make emotional decisions. Making buy or sell decisions based solely on market swings are rarely optimal for long-term investors. That’s where the financial plan provides guidance.
It’s time for a gut check. Well-diversified portfolios heavily skewed to stocks can provide stronger long-term gains, but they come with more risk and greater price swings.
Can you handle the added risk? Has the selloff left you overly anxious? If so, revisit the plan with your financial advisor.
Corrections are never fun. For some, they feel like the end of the world. Historically, however, stocks have a longer-term upward bias.
A long-term perspective and a well-crafted financial plan that takes unexpected bumps in the road into account is a much better approach than Frank’s ill-advised advice.
The fundamentals really do matter…. until fear and emotions take charge.
The economy is expanding at a solid pace; recent data have been strong.
Q4 profits have been very upbeat and the 2018 outlook is very rosy.
Inflation is low.
Interest rates have been creeping higher but remain at a historical low level.
It’s a perfect confluence of bullish events and investors have been pricing in perfection, or something darn near perfection. This makes the market vulnerable to a selloff when the narrative doesn’t play out according to the script.
So what happens when inflation expectations begin to creep higher and faster growth spooks Treasuries? Investors begin to price in the new information. Given the sharp run-up in shares over the last year, the reaction can be swift.
It’s a “shoot first, don’t ask questions, and shoot anyone who does” mentality—that in large part, may be driven by technical factors and trading programs. Or, as Josh Brown states in his blog, “Some people are selling because they aren’t people at all, but software programs that have been programmed to sell when others are selling.”
The fundamentals really do matter…but not today.
Good news is good news… until it’s bad news Recall the 1980s and 1990s, when strong economic news lifted rate hike expectations, and, at times, created a stiffer tailwind for equities.
For example, 1994 produced great economic news, and the Fed reacted by sharply lifting interest rates. The bond market was hit hard; yet, the S&P 500 never corrected by 10%.
We haven’t seen that in this expansion, i.e., good economic news has been a positive catalyst for stocks. Though I’m not willing to commit at this time, it’s possible the pendulum is beginning to shift.
Back to the fundamentals While the fundamentals didn’t matter today, they are critical medium-term supports to the market. It’s something we’ve seen since the bull began.
Yesterday’s selloff – 1,175 points is an attention grabber. Still, it’s not in the top 20 largest percentage losses.
We knew volatility would eventually return; timing, however, was virtually impossible.
But, and this is big, we’re not seeing shares selloff because of cracks in the credit markets, weak economic data, global central banks signaling much tighter policy, reduced profit forecasts, etc. It’s not a macroeconomic event.
Selloffs like these wipe the euphoria and froth out of the market and are healthy in the context of a growing economy. It’s like taking nasty medicine. Yuck! But it cures what ails you.
No one knows when we’ll bottom – maybe today, maybe after the S&P 500 officially moves into correction territory.
We’ve seen volatility before. Recall the 11% drop in the S&P 500 in just five days during Aug 2015, or the quick decline following Brexit.
But shares recovered.
Bear markets typically correlate closely with recessions. Short term, the data are not signaling a recession.
The new year is well underway, and the bulls have clearly asserted themselves.
What, me worry? That seems to be the mantra for investors as stocks are off to a roaring start in 2018.
The themes that dominated 2017 are carrying over into the new year, including moderate U.S. and global economic growth, still-low interest rates, low inflation, and corporate profit growth.
But as we wade through January, we can add one more variable—the impact from the dramatic cut in the corporate tax rate is quickly filtering into the outlook for 2018 profits, fueling bullish sentiment.
The reaction in the market has been swift, as investors price in a sharp upward revision to 2018 earnings estimates, according to Thomson Reuters.
I believe Warren Buffett summed it up well last week when he offered his thoughts in a CNBC interview.
“You had this major change in the silent stockholder in American business, who has been content with 35%…and now instead of getting a 35% interest in the earnings (he noted foreign earnings are more complicated) they get 21% and that makes the remaining stock more valuable.”
If you had asked me at the end of October whether the president would sign a comprehensive tax reform bill just before Christmas, I would have wagered that the hapless Denver Broncos would have a better chance of landing a spot in the playoffs.
Well, Trump signed the biggest changes in the tax code since 1986. And he did it three days before Xmas. GOP 1, Me 0.
Michael Kitces writes, “The legislation will result in substantive tax reform for corporations, with the elimination of the (corporate) AMT and consolidation down to a single 21% tax rate, all of which are permanent.
“However, for individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to a(nother) infamous sunset provision after the year 2025. Michael Kitces writes.”
I agree.
From an economic perspective, the GOP is hoping to unleash the economic animal spirits that have been lurking below the surface for much of the expansion.
Will it work? Economists are divided.
Nearly 90% of economists believe the cuts will fuel a modest surge in growth over the next couple of years, according to a WSJ survey. But opinions are divided after that.
If reform simply spikes the punch bowl for two years, it will likely be deemed a failure. But if lowering the corporate rate and providing big incentives to buy capital equipment boost the supply side/the productive side of the economy, it will yield tremendous benefits.
One thing’s for sure, the U.S. no longer has the third-highest corporate tax rate among 188 nations. It now has a business tax code that is more likely to attract foreign investment and job-creating capital.
Simply leveling the playing field (or in several cases, tilting it toward the U.S.), reducing the punitive nature of the tax bite, and dragging an arcane system into the 21st century has to be beneficial… at least on some level.
Coincidentally, the S&P 500 Index was just embarking on a string of closing highs that hit 20 as October turned the page. It’s impressive.
Credit moderate growth at home—GDP in the U.S. has run at 3% or higher for the past two quarters, a streak that was last matched in 2014.
But, do not discount the acceleration in economic activity around the world. China, Europe, emerging markets, and even Japan have been posting respectable numbers.
One critical byproduct for investors—a sustained uptick in corporate profit growth.
But it doesn’t stop there.
The Fed has been cautious in hiking interest rates, and inflation remains low by historical standards.
If I had to concoct a recipe for a bull market, I wouldn’t hesitate to mix in all three components.
Looking ahead
No one can consistently call the highs and lows in a cycle, and I’m not about to buck the trend. International or political jitters could spark a new round of volatility. We’ve seen it before.
But anxieties were short-lived as worries receded amid the backdrop of a fertile economic environment for stocks.
There is an old Wall Street adage most of you know. Bull markets climb a wall of worry.
I recently came across the weekly survey of Investor Sentiment from the AAII.
Bullish sentiment sits at just under 30%. Put another way, over two-thirds of investors are neutral or bearish. You have to go all the way back to January to find a reading above 40%. And 40% isn’t that euphoric.
Fundamentally speaking Think about it. The economy is moving along at a modest pace, inflation is low, corporate profit growth is strong, and interest rates remain near historic lows. If I had to come up with a recipe for a rising stock market, I’d bake a heavy dose of those ingredients into the cake.
Still, most investors aren’t very ecstatic.
Without a doubt, there is no shortage of scary headlines. But the headlines just aren’t having much of an impact on shares.
I’m not smart enough to time the next correction. Who is? But as we turn the corner and head into fall, the fundamentals are setting the tone.
We’ve witnessed an enormous amount of complacency over the last few months. Whether it’s the latest revelation about Donald Trump or geopolitical worries coming out of North Korea, nothing seems to spook the bulls.
That is, until several key global central banks have talked about raising interest rates—the Bank of Canada and the Bank of England—or ending massive bond buys—the European Central Bank.
Let’s state the obvious: stocks never move up in a straight line.
Let’s state the obvious: corporate profit growth is the biggest variable in determining the direction of stocks over the longer term.
Remember when QE in the U.S. was ending? That would kill the bull market. Then we were subject to pundits who claimed that higher interest rates are bad for stocks.
Well, QE is long gone, the Fed is hiking rates, and the Fed appears set to gradually wind down its balance sheet, probably in September.
Where am I going with this? That’s simple. By itself, winding down stimulus by the ECB or rate hikes by other banks are unlikely to be enough to derail the bull market IF the removal of monetary stimulus is in response to faster global economic growth.
Sure, we may see some day-to-day volatility, but rates remain very low among the developed economies.
Yes, we will eventually write the obituary for the second-longest bull market since WWII; however, if history is a good guide, the economic fundamentals and a recession will likely set the fuse for the next significant downturn, not simply chatter that rates may go higher.
That’s a phrase reality TV star Donald Trump uttered with regularity during his run on The Apprentice.
Tuesday afternoon, it became a reality for FBI Director James Comey, setting off a political firestorm and generating fears it would roil markets on Wednesday.
While the politicos and the press are salivating, investors reacted with one giant YAWN. Just look at Wednesday’s response for stocks, Treasuries, the dollar, the VIX, and gold.
How the market digests new revelations in the days and weeks ahead would be speculative. For now, the market sees this as a political event, not an economic event—much like Syria, North Korea, and the just-concluded French election. Put another way, it’s noise.
What about tax and health care reform? Some are concerned this will derail the “Trump Agenda.”
While stocks soared amid expectations of business-friendly tax cuts, more recently, a strong Q1 earnings season, upbeat guidance, and stronger global growth have picked up the slack. Think of it as the passing of the baton.
Moreover, any cut in the corporate tax rate has not been factored into analyst earnings forecasts. It would be icing on the cake at this point.
Longer-term, it really is “the economy, stupid.” That’s a phrase made famous in the 1992 presidential campaign.
A quarter century later, it’s still relevant to investors.
