Bull markets do not die of old age, they die of excesses such as accelerating and above-trend economic growth, rapidly rising inflation, and interest-rate hikes from a hostile Federal Reserve. Those excesses are simply not with us today, nor do I expect their arrival anytime soon. -Leon Cooperman (circa 2007)
While Mr. Cooperman failed to realize the impending mortgage crisis, the subsequent expansion over the past ten years has been markedly slower than in previous cycles, which should keep things from overheating (and allow the bull market to continue). Growth has averaged around 2%, inflation has averaged 2%, and the ten-year treasury yield has averaged 2%. We believe that this 2-2-2 phenomenon is ideal for the continuation of market growth. GDP growth remains modest, inflation remains subdued and global interest rates remain very accommodative to both corporations and individuals.
While nothing in the near term leads us to believe the bull market is nearing an end, we would be remiss not to remind folks that a pick up in volatility would not be a surprise.
- We continue to forecast moderate economic growth for the foreseeable future and expect continued corporate profit growth as margins stay reasonably high and earning expand.
- Unlike the fears that we saw near the end of last year, monetary policy is not tight, and we do not expect interest rate hikes anytime soon.
- In addition, M2 money supply (includes cash and checking deposits, savings deposits, money market securities, mutual funds, and other time deposits) growth has accelerated, growing at a 9.2% annualized pace in the past six months (from a 6% trend growth level).
- Corporate America is still adapting to a more favorable tax (and regulatory) environment.
- Consumers continue to spend bolstered by an increase in purchasing power due to decent wage growth, low unemployment, and relatively low financial obligations.
- Trade policy is more likely to get better going forward, rather than worse.
- We are close to signing a deal with our top two trade partners (Mexico & Canada);
- Recent signs have been more positive than negative on the China front (third largest trade partner);
- We have agreed on the framework for a new trade deal with Japan (fourth largest trade partner).
- Globally, BREXIT may finally move forward if (as predicted in the polls) UK PM Boris Johnson wins the snap election, which should provide him the votes to leave the EU with a deal and the support needed in Parliament.
As mentioned above, financial conditions continue to look positive for market growth. Even though that is the case, some short term technical indicators (pictured below) are sending signals that we may be overbought in the short term. This could lead to some short term volatility, which is normal in all market conditions.
As we look on to 2020, geopolitical issues remain a concern, and political developments will continue to be scrutinized, which could cause us to rethink our growth perspective; but for now, we believe monetary policy, the economy, and the markets are well balanced.
While the least path for resistance is higher, some technical indicators are saying we are (short-term) overbought.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome – including performance – is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.