Is the Bull Market Over?
Is the bull market, which started after the lows of early 2009, coming to an end? Let's have a look at some data, as well as the arguments pro and con, to see if we can find any insight. In particular, I want to look at the latest economic, corporate and market issues to see what we might learn.
First, the U.S. economy. As we have observed, it has been a long slog out of the depths of the financial crisis. Gross domestic product growth has never really taken off; wage growth is weak; and retail sales, except where cheap credit flows freely, have disappointed. Many people have little or negative equity in their homes. I have explained -- or if you prefer, rationalized -- that this is typical of other post-credit-crisis recoveries.
The primary upside to the U.S. economy has been job creation, housing and demand for capital.
Start with the recovery in the labor market. Unemployment now is 5.3 percent, almost half of what it was in the aftermath of the crisis; 11 million jobs have been created since the Great Recession ended. Job openings continue to increase, and there are signs that wages may finally begin to move higher. This is significantly better than it has been at any time since 2007.
Second, housing has improved. It is still below where it should be under normal circumstances, but as we have noted, these are not normal circumstances. Aided by low inventory (courtesy of the aforementioned equity issues) and cheap mortgage rates (courtesy of the Federal Reserve), prices are rebounding. We are also seeing building permits rise, and bidding wars for both buyers and renters are not uncommon. In select coastal and urban areas, there are definite supply shortages. Despite this lumpy and unevenly distributed improvement, the housing recovery is occurring.
Last, and perhaps most meaningful for where we are in the current cycle, is demand for capital. With rates as low as they are, demand for private equity, venture capital and corporate borrowing has been robust. It has reached the point where the Fed is thought to be on the verge of raising rates.
One caveat: U.S. corporations do have a problem deciding what they should do with all their excess cash. Although the default setting has been share buybacks or dividend increases, it would be better if they increased research and development and capital expenditures. That would help drive the next phase of any virtuous economic cycle.
In general, profits continue to hang in there. But commodities have been punished, with the energy sector getting hit hardest; oil is down almost 60 percent from last year's highs. Lower energy costs typically result in higher consumer (and to a lesser degree, corporate) spending. That has yet to really show up in the data.
A similar risk to corporate profit margins is the competition for workers. It isn't a coincidence that as unemployment has fallen, low wage shops such as Wal-Mart and McDonald's have said they will raise wages. At some point in the future, this should work to the benefit of retail sales, which in turn, lets these retailers hire more workers and pay them better. Don’t get too excited, as we have not yet seen much evidence of this particular virtuous cycle.
There are many negatives, or course -- there always are. But I see two that in particular are noteworthy. And perhaps surprisingly, the possibility of a Fed rate increase sometime in 2015 isn't one of them.
The first huge risk has to be China, which last week joined the currency wars in a sign of desperation as its economy tanks. Its stock market bubble has popped and it's dealing with a huge debt overhang. China both reflects and drives a significant percentage of global economic activity. It looms large when we consider what it means when industrial metals such as copper and iron ore have huge price declines. Countries and companies that prospered by feeding China's factories face the biggest potential hits.
The second negative has to be the technical deterioration of the markets. I don't trade day to day, so I am not all that concerned about every 5 percent or 10 percent pullback. Still, investors who are long never benefit when bull markets narrowing as this one has. Almost 30 percent of the Standard & Poor's 500 Index components are down 20 percent or more from 52-week highs.
So is the bull market over?
I find it hard to reach that conclusion. At the very least, we have been long overdue for a simple 10 percent correction. And while the economic data has been on the mixed side, we don’t see the usual indicators of recession, at least in the U.S.
For individual stocks, you can certainly tighten up those stop losses. But until we see more negative economic and corporate data, the option of giving the market the benefit of the doubt remains the most appealing choice for asset allocation portfolios.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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