It's official: as of today the bull market that has been mocked as fake, doomed and history’s most-hated just earned a new title: the second-longest ever. And it only took $14 trillion in central bank liquidity, a global, coordinated central bank "put", central banks purchases of Treasuries, MBS, ETFs and corporate bonds, and nearly 700 rate cuts in the past 7 years to achieve it.
The stock market advance that started seven weeks after Barack Obama's first inauguration, and specifically with Obama's historic March 3, 2009 remark in which he said that "what you're now seeing is, profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long term perspective on it," has now lasted 2,607 days.
Since then it has dodged and waved through three 10% drops in the last 19 months while avoiding the 20% decline that denotes a bear market. That matches a rally from 1949 to 1956 which straddled the presidencies of Harry Truman and Dwight D. Eisenhower. Only the dot-com bubble of the 1990s lasted longer at 3,452 days.
That means if central banks wish to inject another $14 trillion or so in liquidity to extend the duration of this "most fate, most hated" bull "market", they will need to last another 845 days, or roughly another two and a half years, to make the current rally the longest ever without a bear market.
AS Bloomberg writes it may be an uphill battle: "the rally is showing signs of fatigue: for the first time its rolling 12-month return is negative, and companies in the Standard & Poor’s 500 Index are reporting their worst profits in six years. At the same time, economists are steadily downgrading their growth forecasts, the international outlook is much worse and investors are pulling money from equities at an unprecedented rate."
However, as Bloomberg also writes: "The Federal Reserve and other central banks have shown time and again that they stand ready to inject more cash into the financial system at the first sign of market turbulence."
Just in case anyone wonders why it is the "most-hated rally" (which it isn't as participation, if only from companies buying back their stock, is at an all time high).
Some are puzzled by the general reluctance to embrace central planning: "I don’t remember another post-war bull market that was this fearful, chronically and persistently,” said Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc., which oversees $337 billion. Investors are “forever prepared for the end of the world, but reluctantly being dragged back into to equities."
Perhaps Paulsen should thank Yellen et al. company for disconnecting the world's once upon a time most forward looking, most efficient discounting mechanism from all fundamentals. And yes, that's a fact: the New Yorker writer John Brooks’ chronicle of the 1950s bull market is called “The Seven Fat Years,” a title few people would apply to America since the financial crisis. In truth, the signature characteristic of the Obama bull market has been its ability to soar above an economy going nowhere, returning 3.7 percent a quarter on average since March 2009, compared with a 0.9 percent gain in gross domestic product. That gap is the widest ever.
Meanwhile, despite relentless central bank intervention, the rally may be topping out. Stocks are stuck in their longest period of stasis since the rally began, going 11 months without posting a 52-week high. Fallow periods lasting longer than 12 months are poison to chart analysts, who view them as an indication of waning momentum over the long term. In the past, deep losses have not only signaled the end of bull markets but also foretold recessions.
As Bloomberg writes, a study by Leuthold Weeden Capital Management LLC showed that since World War II, the S&P 500’s rolling 12-month returns adjusted for inflation have averaged minus 9 percent at the economy’s peak. The measure reached minus 9.6 percent in February.
Another curious characteristic of the "bull market" - it's been driven by... selling?
Americans have been sellers of equities since 2007, slashing stock holdings by $2 trillion, data compiled by Fundstrat Global Advisors LLC show. While the pace of the liquidation is unprecedented since 1956, that represents a huge pool of potential demand, according to Tom Lee, the firm’s managing partner. Investors’ exodus during the decade that started in 1979, the year when BusinessWeek featured a cover story titled “The Death of Equities,” preceded a 400 percent rally in the 1990s.
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So what happens next? Well, at the end of the day just two things matter: interest rates and corporate profits. While central banks are firmly determined to push rates as low as possible to expand multiples to record levels, they are having trouble with profits. Indeed, Bloomberg concludes that it may all boil down to earnings. More importantly, corporate earnings are in the midst of the fourth consecutive quarter of declines as weakness from energy spread to all but three industries. The trajectory of profits will determine the path of stocks going forward, according to David Joy, the Boston-based chief market strategist at Ameriprise Financial. “A lot of reasons to hate this expansion and bull market, and yet it keeps on going,” said Joy. “Certainly most of the money has been made. Certainly we’re closer to the end than the beginning. There is probably some chance that we see higher prices down the road, but all depends on earnings.”
Golf clap central bankers.
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Finally, here are some thoughts on what happens next and can the second longest bull market become the longest ever, courtesy of BofA's Michael Hartnett.
The Path from No. 2 to No. 1
- First, the last years of the longest ever equity bull market (i.e. the late-90s) were marked by cross-asset volatility and a bubble; that remains a plausible risk scenario.
- Second, this bull market is trading more like the mid-50s bull market which slowly exhausted itself and then reversed for a year or two as the investment cycle moved to “overheating” in 1956-57 and then brief “recession” in 1956-57. Note how asset markets have struggled to produce upside since the era of excess liquidity came to an end and/or illustrates how low expected returns of bills, bonds, equities, and indeed all risk assets have become thanks to “financial repression”. The total return from a portfolio of equities, bonds, commodities, cash split percentage-wise 50/35/10/5 from the secular lows of 2009 to the end of QE3 in October 2014 of an investment of $100 would have grown to $198. Since the end of QE3 the same portfolio would have fallen 3.4% to a value of $192. Note this also shows a diminishing “wealth effect” for the economy, another reason to be long Main Street, short Wall Street.
- Third, another factor behind the fatigue is earnings, which as the following chart shows, have also faded in recent quarters (even excluding the energy sector). Our shift in recent years from “raging bull” to “sitting bull” to “volatility bull” reflects low probability of the Higher EPS & Lower Rates in coming quarters.