Do Bull Markets Die of Old Age?

Thursday, November 02, 2017

I recently received an email from a client who was celebrating his recent portfolio value and then ended his email with a question. His question was, "How long can this bull market continue?"

Of course, I responded that I don't have a crystal ball. I also remembered the famous quote, "There are two types of forecasts - lucky or wrong."

The truth is, no one knows what the future will bring and trying to predict market movements is a fool's errand. Another famous investment rule is that bull markets don't die of old age, with many economists believing they die from the ill-effects of a credit cycle or from a policy mistake by the central bank tightening inadvertently.

If the current economic expansion lasts another year and a half, it will be the longest on record, surpassing the expansion of the 1990s that ended in early 2001.1 Looking at the current expansion while it may be getting close to the longest, it is certainly not the best. From the recession bottom to the expansion peak, real GDP expanded 39 percent in the 1980s and 43 percent in the 1990s.2 We are eight years into this expansion and real GDP is only up 19 percent.

If you are an investor in equities it is hard not to be excited about the returns being generated in the last 12 months. In my opinion, there are certainly some factors that have helped push the equity markets higher in the last year.

Optimism that President Trump was going to push a pro-growth agenda has certainly influenced the markets. In fact, the University of Michigan's preliminary consumer sentiment index for October came in at 101.1.3 This is the highest reading since 2004 and certainly reflects that consumers are feeling good about spending, employment, and wage increases in the current environment.

Another factor is GDP growth. The second quarter GDP was reported to be 3.1 percent and the first quarter was reported at 1.2 percent.4

In another week or so the first estimate of 3rd quarter GDP will be released. The expectation is that it will be close to 3 percent or slightly below because of the short-term negative impact of the hurricanes in late September. Unemployment is the lowest it has been in 16 years and jobs are available in almost all sectors.

The President certainly has issued executive orders and eliminated many regulations that hurt economic growth, but Congress has passed very little legislation that would help expand economic growth.

The proposed tax reform, in my opinion, will help expand the economy and if expansion takes place corporate profits should continue to grow. If Congress fails to deliver on a tax reform package then I certainly expect some response from the markets.

Yogi Berra is supposed to have said that, "It's tough to make predictions, especially about the future."

I gave up a long time ago trying to make predictions about the future.

History says that economic recessions will happen and at some point the current expansion will slow down, stop, and reverse course. It could happen next year or it could be another 10 years down the road.

Investors should concentrate on long-term goals when it comes to their portfolios and it may be time to meet with your advisor to review those goals. If the last eight years of growth have exceeded your portfolio expectations then perhaps it may be a good time to rebalance.5

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1 economics@ftadvisors, 10/09/17
2 economics@ftadvisors, 10/09/17
3 http://www.sca.isr.umich.edu/
4 Bureau of Economic Analysis, 9/28/17
5 Rebalancing assets can have tax consequences. If you sell assets in a taxable account you may have to pay tax on any gain resulting from the sale. Please consult your tax advisor
The opinions expressed are subject to change with economic and market conditions. They are not meant as investment advice. Forward looking statements and market forecasts cannot be guaranteed and may not come to pass.

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Wesley Lentz Wesley Lentz

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