"Successful investing is anticipating the anticipations of others."-John Maynard Keynes
The S&P 500 hit a new high on Friday, August 24 and in the process of doing so confirmed the longest Bull Run in U.S. stock market history, which began on March 9, 2009. (Note: as measured by closing prices, which is the preferred approach, at least for historical comparisons since accurate intraday pricing is a fairly recent phenomenon).
It’s a reasonable moment for investors to take stock (pun intended!). A long bull market isn’t in and of itself a risky sign, but when it comes, the fall from the top of a hill hurts more than a fall from the bottom.
It is interesting to review the last time we were here, near the end of 2007. The market was riding high on a 5(+)-year bull market, but warning signs abounded and were duly ignored. In early 2007, stress was evident in funding markets (as measured by the LIBOR-OIS spread, a measure of the availability of short-term financing). Sowood Capital in Boston, a hedge fund that was an off-shoot of Harvard Management Company (which manages Harvard’s endowment funds), failed in July. Two real estate funds at Bear Stearns (a firm that would not survive the crisis a year later) also folded that summer. Banks were making ever more “desperate” pleas for ever more financially stressed consumers to take out personal, or “consolidation” loans. In the 4th quarter of 2007, inflation jumped (hitting 4% for a quarter for only the second time in 25 years). The yield curve was flattening (and ultimately inverted).
Where are we now? Inflation has perked up recently. The yield curve is flattening (the spread between the 2-year Treasury and the 10-year Treasury is only 19 basis points and the premium of the 30-year to the 10 is only an additional 15 basis points). The Shiller CAPE (cyclically-averaged price-earnings) ratio at 33.03 is at its second highest level in history, being eclipsed only by the period just before the dot-com bust in 2000, and now exceeding the reading just before the crash of ’29. Bitcoin and its crypto-currency cousins have been sinking precipitously, a hint that easy money is becoming less so. My phone has recently been inundated with offers from banks for personal loans and lines of credit. The Wall Street Journal, in a page-one story (“Lenders Push Risky Loans”) on August 25 noted the nationwide trend toward banks offering such deals, often on an unsecured basis. The effect of the new tax laws has largely been priced into stocks and while earnings have been robust, the market seems not to have priced in even a breathing period after recent rapid growth. Geopolitical factors (Brexit, Turkey, North Korea, Iran, Russia, and trade tensions) are higher than normal. The upcoming election cycle, and certainly the presidential one to follow, which no doubt will provide political theater like none seen in our lifetimes, could roil markets.
All that said, the bull could certainly run for a year or more to come. Our oft-quoted caution on predictive ability is apt. Yet, in light of all of the above, a defensive stance seems in order. It’s not “different” this time, another bear is out there and even missing some upside from here to the death of an old bull should leave one positioned to get it back (and more) on the rebound.
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