The Bull Market celebrated its 9th birthday this week. The Bear cycle low of 666 was hit on the S&P 500 on Friday, March 6, 2009. That weekend was anxious and the feeling that the Stock Market could actually go to zero was real. They were really dark days. 9 years ago capitalism nearly broke. I will never forget it, that is for certain. They say it’s always darkest before dawn. The following Monday, March 9, brought the beginning of the new uptrend amidst the ashes of the Financial Crisis. The baby Bull was born. 109 months later, the S&P is up over 300%. So much has happened since then. Things are so much brighter today. But nearly a decade later, the wounds are still there. Nerves are still shallow. The memory still brings fear. Nobody wants to go through anything like that again. But perhaps we are better for it. If you value Nietzsche’s perspective, it was a necessary and healthy shakeout. “That which does not kill us, makes us stronger.”
This Bull Market is the second longest and second largest since World War II. It is second only to the Dot.com Bull which lasted 114 months and gained over 400%. The Dot.com Bull brought full-blown euphoria and asset prices were inflated, well beyond any norm. It’s quite different from today’s Bull, which is not cheap by any stretch, but it is not exceedingly expensive either. A little euphoria started creeping in towards the end of last year, but February’s correction erased it immediately. Importantly, the fundamental backdrop is quite healthy right now, as evidenced by both economic growth as well as earnings growth. They are both accelerating. The Market engine is quite strong. We have no doubt that this current Bull outlives the Dot.com Bull. Whether it ultimately outdistances it in price is debated.
February’s job report was much stronger than expected. Over 300,000 jobs were created, but perhaps more important, inflation was revised a tick lower. Expectations were for just over 200,000 new jobs created. The Market likes the beat. This was the strongest report in nearly 2 years. Wage inflation cooled a bit to 2.6% and the January number, which spooked the Market as the catalyst for the correction a month ago, was ratcheted down to 2.8%. The Market likes that. This shouldn’t change the Fed thinking of higher rates this year, with a 4th hike likely in December. The first one for the year will come in 2 weeks at the March meeting. Inflation is definitely on the rise, which has caused the recalibration to account for the growth of earnings, the economy and how much has already been priced in. Core Inflation has been absent throughout the life of this Bull. It is finally showing up. But importantly, inflation is inching, not racing. Interest rates are higher, which is actually a good thing. Rates are rising for the right reason.
Earnings Season is coming to an end. 97% of the S&P 500 companies have reported for the 4th Qtr. The numbers are really solid. 74% have beaten on earnings and 77% have beaten on revenues. These are great numbers. Q4 earnings grew nearly 15% year over year, marking the strongest quarterly growth since 2011. It’s also the fastest revenue growth since then too, just over 8%. Earnings for 2018 are now slated to be $157 now, a sharp increase from just a month ago. That has the Market trading at 17.5X this year’s estimates. The Stock Market is not cheap, but it’s certainly not wildly expensive either.
Market turbulence returned with the prospects of a possible trade war. The steel and aluminum tariffs were pushed forward this week, something that rattled the Market when the idea was floated last week. However, Stocks started moving higher after word spread that the White House was softening the tone on Mexico and Canada. For now, it is less of an issue. But how the rest of the world responds is. Also adding to the optimism was the prospect of a meeting between North Korea and the United States. This is being met with equal doses of optimism and skepticism. That’s about right.
These are interesting times in which we live. There’s always something. Despite all of the controversial issues, this Market has maintained its resiliency throughout. It’s the character of this 9-year old Bull. We are prepared for anything that comes our way, not convinced that the correction has been completed quite yet. 2018 will be remembered for its volatility. There’s quite a bit to go. We do believe that this Bull will see a 10th birthday, before it calls it quits. We know it’s going to be another eventful and volatile 12 months.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
