A new record intraday high for the S&P 500 on Tuesday arrived at an interesting time: It not only erased the stock market correction that kicked off 2018, but also landed on Day 3,452 of the bull market.
The remarkable run-up since early 2009, by most accounts, is now tied with the longest U.S. bull market in history, pulling even with the tech-fuelled boom that drove stocks higher between November, 1990, and March, 2000.
Should investors be celebrating or cowering?
As any strategist will tell you, bull markets don’t die of old age. By that, they mean that the longevity of this particular rally of more than nine years, driven by low interest rates and rising corporate profits, has no bearing on the next nine years, or the next week.
“We like records, we like round numbers, it’s a concept we like to talk about and tweet about,” Charlie Bilello, director of research at Pension Partners LLC, told Bloomberg. “But no one in his right mind would use this as an investment strategy.”
Indeed, what’s more important is the backdrop to current market conditions. Some observers believe that rising interest rates, a flat yield curve and investor complacency paint a late-stage business cycle – and a bull market that is sprouting more than a few grey hairs.
“Americans don’t seem to have a worry in the world, which is one reason they should probably be worried,” David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, said in a note.
He pointed to the New York Fed’s disappointing forecast for U.S. economic growth in the third quarter, slowing business spending and declining high-end apartment sales in New York as evidence of an oncoming downturn.
“Shades of 1989, 2000 and 2007,” Mr. Rosenberg added, ominously. Those years coincided with market peaks, followed by sharp downturns in stock prices.
The current bull market, though, has at least one thing going for it: Companies continue to report boffo profits, easing concerns about stock valuations.
“A key factor supporting the S&P 500 has been the strength of corporate earnings in the United States,” Oliver Jones, an economist at Capital Economics, said in a note.
According to Thomson Reuters I/B/E/S, companies in the S&P 500 are on track to report an astounding 24.8 per cent profit growth in the second quarter, year-over-year. Nearly 80 per cent of companies have beaten analysts’ estimates, which is well above the average “beat” rate of about 64 per cent.
Big technology companies – such as Amazon.com Inc., Google parent Alphabet Inc., Facebook Inc. and Netflix Inc. – have helped drive gains.
Yet, even Mr. Jones is worried about what comes next.
“The boost to margins from corporate tax reform should now be accounted for in analysts’ expectations,” he said. “And we suspect that the U.S. economy will not remain in fine fettle for much longer. We forecast that it will slow sharply next year as fiscal support fades and Fed tightening bites, weighing on sales."
The U.S. Federal Reserve has raised its key interest rate twice this year, and is widely expected to raise rates two more times before the end of 2018, drawing the ire of U.S. President Donald Trump, who believes that tighter monetary policy under the current Fed chair, Jerome Powell, will sap economic activity.
A flat yield curve, where there is little difference between the yields on long-term and short-term government bonds, may already be signalling trouble ahead.
“Several months ago, I wrote that we should expect the President to start blazing the trail to identify the culprit when the economy and markets turn the other way – this is a very clever move indeed, and actually happened sooner that I thought,” Mr. Rosenberg said.
Still, with the S&P 500 hitting record highs again (although it closed shy of a record close on Tuesday), and sitting on gains of more than 300 per cent since early 2009, investors are clearly feeling upbeat about the investing climate, even as clouds emerge.
“There is a lot of talk about the end of cycle and how close it is,” said Andrew Hopkins, head of equity research at Wilmington Trust Co., which oversees more than US$80-billion. “But from an economic standpoint, it doesn’t look that way. It looks like we’re still in pretty solid shape.”
What’s more, bull markets don’t have to be followed by disaster. In Canada, the S&P/TSX Composite Index has endured two bear-market corrections of more than 20 per cent each since 2011. Since the most recent correction ended, in 2016, the index has rallied nearly 36 per cent. Currently, the TSX sits just shy of 300 points away from its own record high.
With files from Bloomberg and Reuters