How Long Will It Last?

We are approaching the ten-year anniversary of the 2007 market top, enjoying the second largest bull market on record. A Wall Street adage posits that “bull markets don’t die of old age”. In fact, they end due to something or things very specific. The difficulty is that those “things” aren’t the same and they are difficult to recognize in advance. So, what are some of the signals of a market top that portend the end of a bull market?

Often inflation is the culprit. Asset bubbles like tech or housing have been behind major meltdowns. A market top is often marked  by overvaluation, individual investor euphoria, global economic concerns (like China), or wide divergence in individual stock participation. The 2000 and 2008 market tops were accurately foretold by an inverted yield curve – a condition where the 2-year Treasury bond pays more than the 10-year Treasury bond.

Looking at these attributes, only one appears to be flashing red – valuation. Traditional valuations indicate the market is more overvalued now than at the 2007 peak. However, overvaluation can last a long time. Many are saying the market is “fairly” valued based on the big picture. Economies around the globe are growing – approximately 75% of the world economies are in growth mode – even Greece is growing! Interest rates are low by historic standards creating few investment alternatives, like bonds, cd’s, etc. Corporate earnings are increasing – driven by revenue growth and expense discipline. US economic growth is accelerating, unemployment and inflation are low, consumer debt is moderate – the US economy may have years to run. Growing economies create growing earnings which drive stock prices.

Inflation is pretty tame. Over the last eight years, the Fed has attempted to raise inflation with low Fed rates and bond purchases; to no avail. An aging global population (especially in the US) consumes less; health care and college costs are climbing at a slower rate; energy technologies are keeping the lid on oil prices; ecommerce is keeping retail prices in check, and the Financial sectors are flush with reserves. Most believe the Fed will raise rates in December, but the Fed rate is historically low and many are discounting the number of rate hikes in 2018.  We don’t see inflation risk in 2018.

Investor euphoria, aka “irrational exuberance”, often marks a top – when individual investors fear being left behind and go “all in”. That’s not the case right now. Many investors are skeptical and suspicious of the market’s rise; there is money waiting on the sidelines. Individual investor sentiment is slightly above average at months end - a long way from exuberance.

Though a pullback in the market is overdue and would actually be healthy, we don’t see anything in the big picture that would derail this bull market. It could continue for years. We are closely watching inflation, the yield curve, consumer sentiment, and earnings as gauges of market health.  For now, we think this bull has room to run.

We appreciate your trust and value our relationship.

-Wade

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