The market volatility of August and September has engendered anxiety levels not seen since the 2009 financial crisis. Skittish investors are quick to point out that the bull market run has gone too long and the Federal Reserve will soon raise interest rates.
Yet there are strong signals indicating the bull market is still growing and creating opportunities for investors to put their money to work.
Yes, the bull market is now the third longest in history, but looking at the length of a run doesn’t tell you much about the state of current market conditions. Whatever their length, the demise of a bull market has historically been heralded by underlying economic changes and strong market signals that are absent now.
For example, many bullish periods have ended on the start of a recession, defined as two or more consecutive quarters of negative gross domestic product. U.S. second quarter GDP was recently revised up to 3.7%, following a very small first quarter decline that probably had more to do with unusually harsh winter weather and labor disputes at West Coast ports than with fundamental weakness in the U.S. economy.
Further, there are no signs of trouble in Treasury markets. Most recessions are preceded by a flattening or inversion of the U.S. Treasury yield curve, often a year or more in advance. The current curve is positive – robustly so – and has actually steepened over the last six months.
Also, the ends of bull markets are generally accompanied by a tightening of credit conditions. Yet we see that credit is currently very available, and the Fed continues to supply the economy with ample liquidity.
The Fed has a dual mandate – full employment and price stability. Right now, they’ve only achieved the first. As for price stability, there is a very real danger of deflation, which would threaten future growth and employment levels.
With oil and other commodities dropping in price and a rising dollar beginning to put a drag on U.S. growth, downward economic pressures are likely to continue. Our firm believes the Fed is concerned that a rate increase could generate even more volatility, and may pass on a rate hike for the rest of 2015 as it did at its September meeting.Additionally, continued economic expansion should boost stocks.
We believe strongly that the U.S. economy will continue to expand, and that weakness we’ve seen in Europe, Asia and Latin America will fade, followed by a resumption of global growth. Both Europe and Japan are following the U.S. lead in asset purchases, and central banks outside the U.S. are aggressively stimulating growth by lowering interest rates, reducing reserve requirements and releasing reserves into the market. We could not find a time when so many central banks have been easing so aggressively to stimulate higher inflation. We’ve often said, “don’t fight the Fed.” We wouldn’t bet against other central banks either.
September and October are notorious for volatility, and we expect the rest of 2015 to be no different. However, we believe investors should prepare to ride out the volatility, putting money to work in U.S. and global equities, including Europe, Japan and China.
We also believe we are in the trough of the commodity cycle, with central banks providing the stimulus that will lead to economic growth and higher prices. At the same time, we would reduce fixed income exposure, and tilt toward higher-yielding, lower grade bonds with the potential for higher returns.
So where do we go from here? Expect plenty more volatility over the next few months, but this bull market still as a lot of life left in it.
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