This Is Not the Longest Bull Market Ever

By Path Financial President and Chief Investment Officer Raul Elizalde

bear and bull for blogMany media stories declared that the stock market broke the record for longevity on August 22, 2018. This would be quite an achievement if it were true. Alas, it is not.

As FINRA (the Financial Industry Regulatory Authority) has noted, the longest run belongs to the 12 1/2-year period running from October 1987 through March 2000. The current bull market, which started in 2009, will need to run through 2021 to break that record.

Part of the problem is that defining a bull market is difficult.

A bull market is loosely understood as a period during which stocks keep going up without falling more than 20%. What, then, are we to make of the period between July 16 and October 11, 1990, when the S&P 500 fell 19.9% from its peak? Some analysts round the plunge up to 20% and declare that day the end of that bull market, which then makes the current rally the longest. But those are not quite the “rules”, at least according to FINRA.

Another problem is that is not easy to define a “bear market” either. Does a bear market start right after the 20% decline is reached, or is it measured from the previous high? After the 20% plunge, most analysts backtrack to the day of the previous high and mark that date as the beginning of the bear market. But doing so leaves a weird intermediate period that is part both of a bull and a bear market, as in the graph below. So when does the bull market actually end?

graph

All-time highs are perhaps more meaningful milestones. For the S&P 500, that was the close of 2872.27 on January 26, 2018 and it is still the highest at the time of this writing. But one could also make the case that such level should be adjusted for inflation, for example, or that the intra-day high, not the close, should be viewed as the record.

And whether the market index is really a good proxy for the whole market is hard to say, especially when companies like Amazon, Apple or Alphabet account for such large percentage of the index itself. The market index could be reaching a record level just on the advance of a few large companies, rather than on a general tide lifting all stocks.

The simple fact is that the stock market has been going up for quite a while, but no milestone was reached on August 22, 2018 that has any meaning – not more meaning, in fact, than when market indices reach a round number, like 25,000 for the DJIA or 2800 for the S&P 500. Those are just numbers.

A more important measurement may be the longevity of economic growth. According to the designation of expansions and contractions of the National Bureau of Economic Research (NBER), the U.S. economy has been growing since June 2009.

At 110 months, the current expansion is the second longest in the nation’s history, after the 120-month growth streak recorded between March 1991 and March 2001. The economy will have to grow past June 2019 to surpass it, and there are many questions about whether it can get that far.

Whether the stock market has gone up longer than ever is a question neither relevant not answerable with any precision. What is more important is that the longer it goes, the closer the time when it will meet its inevitable end.

Unfortunately, market participants tend to see higher prices and bull-market longevity as a sign that staying in the game is more important than protecting gains. This could be imprudent. Given that investors are at the mercy of whatever the market does, they should remember that not falling into complacency is one of the few things that they can actually control.

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This analysis originally appeared in Raul Elizalde’s Forbes.com investment column. Click here to follow Raul on Forbes.

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Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or raul@pathfinancial.net.

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Here’s Why Stocks Should Be Higher, And Why They Are Not

By Path Financial President and Chief Investment Officer Raul Elizalde

Photographer: Michael Nagle/Bloomberg

Photographer: Michael Nagle/Bloomberg

The stock market is close to record highs, and given how well everything seems to be going, they should have blasted through those records. Consider this:

• The latest quarterly GDP growth release was the highest since 2014.
• Initial jobless claims as a percentage of total civilian employment are at an all-time low.
• Interest rates are still hovering around the low end of a 100-year range.
• The percentage of companies reporting positive earnings per share surprises is the highest since Standard and Poors started tracking that metric 10 years ago.
• Company repurchases of their own stocks and cash dividends per share are at record levels

Despite these excellent conditions, stocks have been unable to rise above the January highs. Unless they do it soon, it may be time to consider whether stock prices have reached a cyclical peak.

What is keeping stocks from going higher? The only reasonable answer is that the market does not believe today’s conditions are sustainable. Here are some possible reasons:

A global trade war

According to a great number of observers this is probably the biggest threat to global growth. It started when the U.S. imposed tariffs on Chinese imports in late January, and it has escalated since then between the U.S. and China, but eased between the U.S. and other partners in the West, like Canada and the European Union.

Data, however, does not show any negative effect from the trade tensions. Research company FactSet compared second-quarter earnings growth for companies that generate more than 50% of sales outside the U.S. against those that generate more than 50% of sales domestically. The first group (with more global exposure) had 32% larger growth (29.4% to 22.2%). Revenue was even more lopsided, with the first group showing 57% larger growth (13.5% to 8.6%). This is not, however, some kind of proof that trade sanctions are actually a boon for global trade. Rather, it could mean that, anticipating escalation, global companies tried to squeeze through more activity during the second quarter in case tensions get worse later on.

Higher rates

The U.S. Federal Reserve has remained firm in its intention to raise rates twice more this year and three times in 2019. This, in turn, has strengthened the U.S. dollar by more than 9% since January – a side effect that is likely to deepen the U.S. trade deficit and exacerbate trade tensions that are already running high. It will also increase the cost of consumer debt such as mortgages.

Waning global growth

The global economy is slowing down. According to the latest IMF World Economic Outlook, “Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018.” Emerging markets have been hit hard in the last few months, in particular Turkey, whose currency plunged this week, and Venezuela, which is struggling with runaway hyperinflation running at 83,000%.

Politics

The political landscape remains complicated. The U.S. midterm elections in November have the potential of changing the policy outlook significantly if, as some predict, the Democratic Party takes control of the U.S. Congress. Additionally, a report on Russian interference in the U.S. elections that Special Counsel Robert Mueller is expected to release in the coming month will certainly weigh on sentiment. Since the investigation has been shrouded in secrecy, any announcement will come as a surprise and has the potential to move markets.

These are just some of the most obvious concerns, but there are others, such as mounting public debt and ballooning fiscal deficit, and a slowdown in real estate sales due to combination of higher home prices, higher mortgage rates and stagnant wages.

Stocks, therefore, are caught up between excellent conditions today and worries about next year’s outlook. This being the case, even if current economic data continues to excel, any break above the record stock prices of January may prove to be short-lived unless the medium-term outlook improves substantially.

This analysis originally appeared in Raul Elizalde’s Forbes.com investment column. Click here to follow Raul on Forbes.

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Raul Elizalde President Path FinancialRaul Elizalde is the Founder, President, and Chief Investment Officer of Path Financial, LLC. He may be reached at 941.350.7904 or raul@pathfinancial.net.

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