February 2018 - Are We There Yet?

David L. Johanson |


  • Stock market turbulence.
  • Second longest bull market in U.S. history.

The Dow and the S&P 500 had their best January since the 1990's.  The broad Wilshire 5000 index, which covers large, medium, and small companies climbed in excess of 5%.  After a great 2017, the January run-up has led many investors to wonder if this bull market is coming to an end.

Are we there yet?  As a parent, it's a question I have been asked many times from my children on those long road trips.  99% of the time I answer, "No, but we are getting closer".

Many clients are asking similar questions in regards to the economy and the U.S. stock market.  Are we there yet?  We would answer, “No, but we are getting closer”.

Bull markets, on average, last approximately 54 months.  This bull has been treading slowly, but persistently, over the past 105 months, making it the second longest in U.S. history.  The Methuselah of them all (starting in 1990) lasted 113 months.  We are only a stone's throw away from breaking that record.

Even with corporate earnings expected to grow, last week was a week of great turbulence.  In fact, it was the worst week in two years.  The Dow Jones Industrial Average tumbled over 1,000 points or 4.1%.

We are in the midst of a market pull back, one that was overdue.  We would not be surprised if major markets declined by double digits from their peak a couple of weeks ago.  Ultimately though, we're betting that the pullback ends up being one to be bought, not sold.  We'll tell you why later.

The S&P 500 had entered the longest period since 1929 without a correction of more than 5%.  That is now over.  A little more volatility and breathers are good for the long-term health of the stock market.

As markets pull back, as long-term investors, we buy on the dips.  After all, we have had 5 pull-backs of at least 10% during this bull market.  Corrections, which typically last 4 months or so, are no fun, but we get through them as we do with the longer more drawn out bear markets.

When will we get there?

We will see this bull market end and a recession begin when:

  1. Valuations are too high based on irrational exuberance.
  2. The Fed goes too far in raising interest rates.
  3. The U.S. Economy slows.

We are not there yet.  It seems as though this bull market has a little more room to run.

It is hard to find another moment in history when the Federal Reserve is raising interest rates and winding down its balance sheet while the Federal Government is initiating a major fiscal stimulus with the passing of this new tax legislation.  The timing of these events seems to be in harmony.

Love him or hate him, there is little question that the election of Donald Trump has breathed new life into the market that was a little long in the tooth.  The tax stimulus should inject a significant dose of growth into our economy at least through 2018.

  • Business activity is accelerating after two consecutive quarters of 3% or better GDP.
  • Profit growth is the best in six years.
  • American manufacturers should thrive. We have gone from the highest corporate rate among major developed world economies.
  • Corporate earnings should jump 10% just because of the tax bill alone.
  • Continuous deregulation always helps business.
  • $2 Trillion of corporate cash is being held overseas. We could get a flood of liquidity coming back to the U.S. to hopefully lift wages, raise dividends, increase plant and equipment expenditures, as well as stock buy-backs.

Could this be the longest expansion ever?

The longest economic expansion in U.S. history started in 1990 and ended 113 months later.  Other countries such as Ireland and England have had longer stretches, so it is not impossible.

We are now in our 105th month during this current cycle.  Measuring this cycle against other U.S. bull runs may be a mistake.  The downturn and destruction of the Great Recession of 2008 was so severe that a meaningful recovery does not seem inappropriate.

The S&P 500 had advanced 285% since the spring of 2009, but total returns, which include dividends, has increased 363%.  As always, dividends are an important part of returns and lower client volatility, which we endorse.

In the spirit of Valentine's Day, we appreciate the trust you have placed in us.  Love means different things to different people.  To us, it means caring about others and being cared for.  We hope you always know how much we want the very best for you.