The current bull market for U.S. stocks is the fourth longest in history. Two others journeyed into a seventh year, while one other (1990s) enjoys the distinction as having traveled into an eighth year. Even if one subscribes to the idea that “bull markets never die of old age,” probability alone suggests that we are closer to the end than the beginning.
Many market-watchers enjoy finishing the thought on what eventually kills a powerful bull run. “Excessive valuations,” some argue. At the moment, the median U.S. stock price-to-earnings (P/E) and price-to-sales (P/S) ratios are the steepest on record, yet few fundamental analysts show concern. “Recessions,” market-based economists assert. However, the National Bureau of Economic Research (NBER) was not able to identify the last recession until 10/2008 – one full year after the 10/2007 bear began decimating investor portfolios.
What do I think terminates bullish rallies? An intensifying erosion of faith in what kicked off a remarkable rally in the first place.
In the seemingly unstoppable ’90s, Americans placed their never-say-die devotion in a “New Economy.” Gurus guided the herd towards corporations that had yet to show meaningful profits on the notion that the Internet changed the rules of investing altogether. Eventually, the collapse of the dot-coms not only demonstrated that profits still mattered, but an allegiance to a new paradigm resulted in account value meltdowns. Faith in the “New Economy” had been shattered.
In the 10/02-10/07 bull market uptrend, the investment community fell in love with the real estate boom. So strong was the belief that real estate riches are secure – so enamored were market-based investors in the conviction that ever-increasing real estate gains cemented commodity demand and natural resources growth – the masses ignored “sub-prime” and “interest-only” insanity. Even though real estate sales were waning by 2006, it wasn’t until 2008 that we witnessed an intensifying disintegration in structured finance. Before all was done and said, a total eclipse of the financial system destroyed stock-oriented capital, standards of living for retirees as well as faith in the foolish idea that property values only go up.
What will destroy the record-breaking run-up that perma-bulls are currently celebrating? When zero-percent rate policy and quantitative easing combined back in December of 2008, it did not take long before investors began to celebrate financial engineering by the Federal Reserve. It was a rocky ride at first. Severe corrective activity occurred in 2009, 2010 and 2011. Nevertheless, by 2012, investors began to cheer monetary policy as well as the unbelievably slow pace at which the central bank of the United States would raise rates. In fact, every time they’ve hinted at a shift, they’ve backtracked.
The most recent backtrack by the Fed? Remove the word “patient” from its statement on when it would raise overnight-lending rates off of zero, yet simultaneously downgrade its economic projections for 2015, 2016 and 2017. Even more dovish for those with boundless love for Yellen’s Fed? Committee members walked back the projected pace of rate hikes. The previously announced year-end expectation of 1.125% for overnight lending rates has been slashed to 0.625%. Hip, hip hooray for stocks! The Fed’s done it again!
If it is faith in monetary policy that will sustain the bull market, a spasmodic, across-the-board lack of faith in central bank manipulation will eventually poison it.