Is the Longest Bull Market Worth Celebrating?
Sep 21, 2018 | Frank Sakellariou
As of Wednesday, August 22nd, the S&P 500 has gone 3,452 days without a 20% or more decline – a new milestone for the stock market. As we kneel and bow our heads at the majestic strength of this bull market machine, we can't help but feel an air of melancholy as we peek under the hood and examine what's been actually powering it. We believe that the force behind this climb is not just good earnings and strong U.S. economic growth, but also a significant level of artificial support from the central banks for many years in the form of low interest rates. This artificial support is slowly coming off through monetary tightening. Tightening in financial conditions typically leads to corrections in risk assets.
In the last few years, we have seen classic late cycle developments in the markets in the form of euphoric and irrational behavior by investors. In our February blog post titled “Understanding Investor Psychology,” we highlighted what Neuroscience and Behavioral finance research can teach about current market developments.
There is no denying that monetary accommodation is slowly coming off. We believe that the emergence of market volatility we saw early this year was due to a risk-off move by investors driven by expectations of more Federal Reserve rate hikes. In the most recent Federal Open Market Committee (FOMC) Meeting, the Federal Reserve left its benchmark interest rate unchanged but signaled further hikes in the coming months given the U.S economy continues at its healthy pace. The Federal Reserve Chairman, Jerome Powell, later reiterated these points at the Fed's annual retreat in Jackson Hole, Wyoming. The Fed has hiked rates twice this year with two more hikes expected before year-end.
"As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate." – Powell
We are not abandoning the stock market, but we think it is a good idea to start exploring more defensive sectors within that market and proceed with caution. As an Investment Advisor, it is my job to strategize the next move months in advance, sometimes even years in advance, to expose clients to the best possible investment opportunities. These opportunities reveal themselves to us through our team's relentless research and market analysis. It’s our job to help clients navigate uncertainty and to try to minimize the risks ahead. We will continue driving carefully, keeping a watchful eye for road bumps along the way.