FYI | Aug 31 2018
By Peter Switzer, Switzer Super Report
Should you take action with crash talk increasing? I'm not!
This week we saw chatter out of the USA telling us that the S&P 500 index was experiencing the longest US bull market in history! That shocked me because it did not ring true with my research work on bull markets.
Add to that views of people like David Stockman, who was Director of the Office of Management and Budget under President Ronald Reagan, who argues the trade war will puncture the biggest market bubble, leading to a 50% slump in stocks!
Longest in history?
More on that in a minute, but for now, let's look at the bull market issue because if this is the longest in history, then we should be more worried that the end is nigh.
This is what AMP Capital's Shane Oliver says on the subject: "There has been a lot of talk lately that the current bull market in the US S&P 500 is the longest in history, but a lot depends on how a bear market is defined.
"If it's just a 20% fall, then the last record bull market started in October 1990 and ended in March 2000. But I tend to see a bear market as a 20% fall that's not reversed within a year, and on this basis 1990 was not a bear market, as the fall was quickly reversed, and as such, the record started in December 1987 and ran to March 2000 and it's still a long way from being surpassed."
Thank you, Shane. Work I did a few months back came up with the following story about US bull markets:
- Current bull market: 9 years plus and up 300 plus%.
- Average bull markets: 9 years and up 480%.
- 80s bull market: 12.8 years and up 845%.
- 90s bull market: 12.9 years and up 816%.
- The longest: 15.1 years and up 935% (1950s).
On this basis, we shouldn't be too worried that history is warning us that the stock market is close to falling over.
The Stockman view
But what about the Stockman view? I could add to your worries by reminding you that I mentioned about three months ago that Ray Dalio, the market genius behind Bridgewater Associates, reduced his exposure to financial assets. He was heavily invested in Asian and emerging economies' ETFs, so he's timed that well. However, if we followed his lead and sold out of local stocks, we would have missed a 4% spike in the S&P/ASX 200 and, worst still, those who lost money on the banks and Telstra, would have missed out on the stock price uplift over that time.
Over that time, Telstra is up 14.2% and CBA has regained about 5%, with the dividend climbs up towards 7% before franking.
In April, only 18% of money managers in a Bank of America Merrill Lynch survey thought stocks had peaked. Since then, the S&P 500 is up about 6% but the numbers for the bull market still outnumber those against it.
Scott Minerd, Chairman of Investments and Global Chief Investment Officer of Guggenheim Partners, agrees with Stockman, and argues that strong fiscal stimulus at the end of this business cycle, at a time when the economy is already at so-called full employment, is likely to force the Federal Reserve to step in and be more aggressive with interest rate hikes to try to keep inflation in check.
Is the end nigh?
That's probably how this US bull market will turn bearish but the Fed boss, Jerome Powell, recently spoke at the famous Jackson Hole conference and strongly implied that the central bank saw no reason to speed up interest rate hikes. To some, his words "signalled the Fed could even slow down later in the cycle." (CNBC)
Another famous bear, wary of the current stock market, is Paul Tudor Jones, the founder of The Tudor Group and the guy who called the 1987 Crash.
"We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs, such as bubbles in stocks and credit," he said in an interview with Goldman Sachs earlier this year.
He believes a recession is coming in the next year or so, blaming the Fed for taking too long to raise rates, which will lead to overheating. However, the big question for me is the timing.
Undoubtedly, this bull market will end but when? Both the pace of US inflation and the rate of interest rate increases don't make me think a crash is coming in 2018 but I wouldn't be surprised if a trade war escalation led to a correction between now and the year's end.
Watch for debt blowout
The time to be watchful for any signs that this bull market is over will be in 2019 rolling into 2020. President Donald Trump's big budget deficit, which is set to blow out, has to be met by good economic growth and inflation needs to be under control or else the Fed will jack up interest rates.
That time is not upon us yet so I think it remains safe to stay long stocks.
Back in February, Ray Dalio came up with an assessment I'm comfortable with, arguing that he expects the worst in 2020.
"I think we are in a pre-bubble stage that could go into a bubble stage," he told Harvard Kennedy School's Institute of Politics.
This 2020 date was also the time that the Economist Intelligence Unit tipped a recession in the US was likely.
Conclusion? The US economy is powering along and inflation remains subdued. While interest rates are not taking off, the only current concern is trade war talk, not market crash talk.
Ignore the trash talk
Last week, there were favourable rumblings about China and US trade talks being positive and Wall Street spiked, while we in Australia were side-tracked by leadership challenge dramas.
Both the US and Australia have economic readings and corporate profit stories all supporting stocks and, as a consequence, I'm ignoring crash trash talk for the foreseeable future.
One day I will change my view when the facts change. For now, this man is not for turning.
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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