Historic Bull; Missing Bear
During the third quarter, the current bull market in U.S. stocks became the longest running bull market in our history. Beginning on April 10th of 2009, the S&P 500 has gained 430%. During that time, it has also experienced eleven drops of at least 5%, and five corrections of at least 10%. Bull markets end with a drop of at least 20%, when we enter bear market territory. This has been a very resilient bull. Meanwhile, in the bond market, rising interest rates have led to falling bond prices throughout the year.
We may be almost ten years into this bull market, but there are obviously some leftover anxious memories about the Great Recession of 2008-2009. In a recent poll conducted by Betterment Research, 48% of American adults surveyed thought the stock market was flat over the past ten years, while an additional 18% thought the stock market had declined over that ten-year period. A whopping 83% felt that Wall Street was no more ethical now than it was before the financial crisis.
There is a mixed bag of data on the economy and the markets. Real GDP growth in the second quarter of this year came in at 4.1% annualized rate, giving us a growth rate of 2.8% for the past four quarters. For the full year of 2018, GDP growth is forecast to be just under 3%, slowing to just under 2% by 2020. The unemployment rate dropped to 3.9% in July, which is well below the natural rate of unemployment. This is an important factor in inflation forecasts as tight labor markets can cause inflation to rise.
The Federal Reserve has been diligent in raising the Fed Funds Rate to keep the inflation rate from rising above their 2% target. Currently, the yield curve, or the spread between short-term and long-term interest rates, is very flat. Short-term rates have moved up dramatically while long-term rates have stayed stable. This is also a very important factor to keep an eye on. Historically, an inverted yield curve, or short-term rates higher than long-term rates, is usually a sign that a recession is coming.
There is an old saying in the investment industry that bull markets don’t die of old age, they’re killed by the Federal Reserve. That may or may not be true of this bull market, but the Fed has made it clear they will risk a recession to maintain price stability.
It has been said many times that predicting market tops and bottoms is a loser’s game: impossible to win and predetermined to lose based on the actions of those who are trying to win it. Fortunately, investing success does not require the ability to predict these points of inflection. We invest based on our economic and market forecasts and try to focus on the long term rather than short term volatility. The two things we are most certain of is that there will be time periods where we lose money; and that over the long-term the markets will reward us for being patient.
Wabash Capital
