Longest bull market on record, yet room to run
AUG. 20, 2018
- Equity markets rose in another tight week of trading, with the S&P 500 Index struggling to break through the highs from January. Over the past month, the index has traded in a 2% range, and ended the week just 1% below the all-time high. While continuing to draw headlines, there is limited evidence that the trade uncertainty and slowing global growth is impacting domestic fundamentals. The gap between domestic and foreign indexes continues to widen, with the S&P 500 up 8% since April and the MSCI EAFE down 4%.
- It was a very active week for economic data in the U.S., mostly better than expected. The NFIB survey showed small business optimism was at a 35-year high with strong conditions for ramping investment. Retail sales were up 6.4% from last year, perhaps an indication that tax cuts and strong employment is driving greater spending. Leading indicators jumped 0.6% compared with a 0.4% expectation, and 6.3% from last year. Each recession since 1960 has been predated by a negative year-over-year reading, by an average of seven months.
- Slowly, the direction of trade policy is beginning to improve. On Thursday, the administration confirmed talks between the Treasury Department and China, likely on August 22 and 23. This a welcome development given the lack of recent talks. China seems determined to stall discussions until after the midterm elections, betting that Trump will be weakened, though economic data and stock indexes continue to fall, potentially forcing their hand. Retailers are watching with particular interest, given that 41% of all apparel and 72% of all footwear sold in the U.S. is manufactured in China.
The situation in Turkey remains challenging, with political and economic turmoil causing the lira to depreciate 25% so far in August (though it bounced back modestly this week). The broader emerging markets have struggled as a result, with the MSCI EM Index losing 11% this year despite the fact that Turkey only represents 0.5% of the index. There is also contagion worries for Europe, as those banks have not experienced the same degree of balance sheet repair as the U.S. banks since the financial crisis. The Spanish banks are owed $81b, French $35b and Italian $18b per BIS.
Trading dynamics since the escalation of the trade uncertainty are interesting. While a flight to quality would generally be expected, the move hasn’t been from risky to safe, but rather from international to domestic. The S&P 500 has outperformed developed markets by 12% and emerging markets by 22% since the beginning of April.
This week we will break the record for the longest bull market, though the run during the late-90’s was larger by total return. This coincides with a slow, but steady economic environment, along with an accommodative Fed, perhaps setting a blueprint for less volatile markets. Despite the strength, investor fund flows and sentiment show few signs of complacency or “irrational exuberance.” This, along with the strong economic and earnings backdrop should allow continued positive returns.
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