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The Euphoria Phase

FYI | Nov 01 2017

By Peter Switzer, Switzer Super Report

Doomsday merchant Tepper warns of a market crash. Do we believe him?

UK economist Jonathan Tepper, who in February 2016 predicted an Australian property crash, where property values will plummet 30-50%, tweeted on the weekend that we’re now in the euphoric phase of the bull market. This implies that we might need to hold our breath ahead of an eventual market crash!

But this raises a few questions where there are no clear answers. So, let’s list them:

  • How long does the euphoric phase last?
  • As our market lags Wall Street, should we take our crash indicator from the Yanks?
  • Are European markets in the euphoric phase?
  • Could a Trump tax plan getting passed by Congress stretch out the length of the euphoric phase?
  • Do the historically low interest rates worldwide give credibility to the claim that this stretches out this bull market and could easily lengthen the euphoric phase?

You might recall that I have often quoted the famous advice from the legendary investor, Sir John Templeton, which goes like this: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

So, Mr Tepper thinks we are in the euphoric stage and I hate to admit that I agree with him, but what we both don’t know is how long it will last, and at what stage of the euphoric phase we are at.

Butler|Philbrick|Gordillo and Associates, in work called What the Bull Giveth, the Bear Taketh Away, go back as far as 1871 to get a handle on the duration and magnitude of all bull and bear market periods in US stocks over that time.

 The average gain in these bull markets was 178.09% and they lasted 67 months. The median gain was 123.81% and went for 50 months.

But these are average numbers only or old signposts on the past expressed as a generality. I suspect the smartest approach to using history is to ask how long has a bull market gone on for and what kind of gains were made?

The current bull market arguably started in March 2009. I recall it well because after the US rescue package was signed off around October 2008, I started warning nervous investors that history showed the first year after a crash can bring annual capital gain returns of 30-80%!

The five months between November and March kept the pressure on me but it turned out to be a good call.

Focusing on the US market, because that’s the one that looks like it’s in the euphoric phase, it has been bullish for 104 months and is up 222%! But to understand this, let’s see what have been the big, long lasting bull markets of the past.

The biggest and best bull market lasted from 1949 to 1961, over 151 months, where the gain was 413%. I don’t know about you but I breathed easier when I read this. However, I wanted to find more examples rather than one that justified me remaining bullish, despite the Yanks looking a tad euphoric.

And I found it!

Over 1975 to 1987, the US bull market lasted 153 months, registering gains of 391.13%! And then over 1988 to 2000, the rising market went for, wait for it, 153 months again! The gain this time 516.37% before the dotcom bust changed investors’ attitude.

So let’s do a ‘now and then’ comparison.

This current US bull market has gone on for 104 months but on three occasions in my lifetime big bull markets have persisted to beat bearish gravity for around 150 or so months. Meanwhile, the current bull market has wacked on 222% of capital gain but the previous big bull markets have lasted for a range of 391% to a whopping 516%!

I’ve told you before that I think the unbelievably low interest rates, combined with central bank policies to increase liquidity, make this bull market more likely to last a couple more years. I am relaxed about 2018 but I will be more cautious over 2019, though if history is any guide, there could be four years left, given that 150-month number, which seems to bob up fairly regularly.

Of course, I don’t overrate that 150 number as being a crucial indicator about bull markets but the combined info about how long US bull markets can last and how much capital gain follows makes me think that Wall Street is in the early stage of the euphoric phase. And the euphoric phase could be a long slow one because interest rates are low. And I reckon the Fed knows that if it raises rates too quickly, this bull market could give into the bears.

Adding more fuel to this potentially long euphoric phase could be the high chance that President Donald Trump could get a tax reform package through Congress later this year or early next year.

AMP’s Shane Oliver puts the odds at 70% that we’ll see something on the Trump tax front by early 2018.

History says our market should beat the 6800-level before it eventually succumbs to the bears and it should be added that there is usually a reasonable period of market rises above the old high before a crash shows up.

That said, you can’t always assume that history will repeat but on the other hand, if I believe we have at least two years of euphoria ahead, it seems highly likely that we’ll take out the 6000 level first, before challenging the 6800 mark.

Of course, if President Trump fails on the tax front, we could see a correction but I don’t think there’d be a six-month decline in US stock markets where they give up 20% plus. This is the definition of a bear market that Butler|Philbrick|Gordillo and Associates used in doing their research.

I won’t rule out a correction with Wall Street in record territory but the run of economic data and the profit/revenue reporting of many of America’s key companies, such as Amazon, Microsoft and Google-parent — Alphabet — along with even IBM, all point to positives that could take stocks higher.

If interest rates were higher in the USA, I could be more cautious, but that’s not the case, so I’m happy to run with the Yanks’ market euphoria and maybe we’ll get out of the skeptical phase and roll into the optimism phase over 2018.

I damn well hope so!

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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