On March 9, 2009 the S&P 500 hit its low of 666 and it has been on an upward trajectory since. As I write, at 3500 days, it is the longest USA bull market in stock market history.

The gains vs. other global indices has been impressive:
 

 

So now the prevailing logic is we must be near the end, in the late cycle if you will, simply because of the length of this bull market.

If we look at the history of US Bear and Bull Markets since 1926, one can conclude that as far as bull markets go, this one can be classified as “senior”:

(Source: FirstTrust.ca)
 

But one thing market historians know is this: Bull markets, unlike humans, don’t die of old age. The two biggest drivers of stock prices over the long haul do not come from Washington, geopolitics, or commodity prices… those things, among many others, have short-term impacts on markets, but the main drivers when you break it all down generally come down to two things:

1. Corporate Earnings
2. Interest Rates

When it comes to corporate earnings, the earnings “beats” seen this past earnings reporting quarter was unprecedented:



While it may be debatable that the impact of the Trump tax cut was a big part of this and just a “one shot” deal, some may argue corporate America is just getting rolling.

Bolstered by the large scale tax cuts and increased government spending, the US economy has accelerated to its best growth in almost 20 years, the last two quarters registering more than 4% GDP growth.

While the US economy remains at a fairly late stage of the business cycle, one can’t see a recession on the imminent horizon. Credit spreads are narrow, and unemployment is at all-time lows at 3.70%, both consistent of late cycle economic behaviour which takes us to interest rates…

The slope of the US yield curve – a popular tool for predicting recessions – has flattened meaningfully but has not yet inverted. The US Federal Reserve has been tightening, and of the 13 Fed hiking cycles since 1950, 10 have ended in recession:



While US Fed officials describe their balance sheet tapering and rate hikes as “normalization”, it IS tightening to the markets. Seven years of near zero rates followed by a rise to 3% doesn’t feel “normal”.

But so far in 2018, US equities have been the only game in town:

(Source: HedgeWise.com)    

What to watch for in the next little while? Besides the Fed, there’s US/China trade talks, the AMCS deal fallout, trade talks between the USA and Japan, North Korea, ongoing Brexit negotiations, and inflation. That’s a long list.

The biggest negatives/risks I see right now?

1. Federal Reserve Policy Error on Interest Rates
2. Inflation pressures  (see 1999, 2006-’07)
3. Complacency – Too much lending and asset prices bubbles in equities, real estate, etc.
4. Global geopolitical – Trade wars, Euro populism, trade war between US/China, Italy

The list is in order of what I see as potential problems.

So when you read or hear “The Easy Money Has Already Been Made”, don’t believe it. They’ve been saying it since 2009:


 

So while a pullback/correction can happen at any point here, I don’t see an end to this bull market just yet. I don’t see that complacency among investors nor does it feel like that crazy “trees grow to the skies” optimism we see at the top.

No, I think this secular bull market has a ways to go yet, but expect volatility to pick up. And oh yeah, always buy impeachment talk. The more the merrier. Think Nixon 1974 or Clinton 1997-’98, these were fabulous time to buy stocks. I’m pretty sure Trump remains President to 2020 (or maybe longer), but if I’m wrong, one less uncertainty, markets will be strong. Always buy impeachment talk.

The best time to own US equities during the four year US Presidential Election Cycle based on data since 1929 is from the fourth quarter of a Midterm Election Year to the first two quarters in the pre-election year. Average return per period based on the Dow Jones Industrial Average was 16.4%. After the “political noise” related to the Midterm Election is over, equity prices move higher.

The best quarter to own US equities during the US Presidential cycle is the fourth quarter of a midterm election year. The average gain for the Dow Jones was 6.7%.

I will take those odds any time.

 

AROUND THE GLOBE:
 

Canada (Selective Buy)

• • New “NAFTA” (a.k.a. USMCA) deal a positive but still too many questions on energy, pipeline, debt, real estate
  • Are business tax cuts coming next budget?
  • 2018 GDP of 2.0%, looks like 1.5% for 2019

U.S.A. (Buy)

• US economy leads the global expansion – corporate profits continue to exceed expectations
• US dollar strength with Fed raising rates, likely to persist
• Monetary policy becoming less accommodative
• Last two quarters of GDP has come in above 4%

Europe (Hold)

• Brexit terms remain biggest concern
• Are cracks starting to reveal themselves in Italy
• ECB has lagged on tightening as a result
• Populism on the rise in Europe

Asia/Emerging Markets (Trading Buy)

• Chinese markets down 30% in 2018, expect GDP to go to 6.25% from 6.50% in 2018
• Protectionism and trade wars not good for Emerging Markets, and neither are strong US dollar or higher US rates
• Japanese reforms now seem to be paying off, GDP of 1.25% for 2018/’19
• Turkey has had its issues with a collapse in the LIRA and recession

QUOTES

 

“All businesses need to be young forever. If your customer base ages with you, you’re Woolworth’s”
Amazon CEO – Jeff Bezos

 

“My reading of history convinced me that most bad government results from too much government”
– Thomas Jefferson

 

“Everyone has his day and some days last longer than others”
– Winston Churchill

 

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