The Bear Market That Wasn’t…Instead, A Celebration of the Seventh Anniversary of the Bull Market

May 16, 2016
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We now celebrate the seventh anniversary of our post “Great Recession” bull mark.  “The secret to this bull market has been its ability to embrace and relish a chronic wall of worry.  From its beginning, the stock market has always been considered at imminent risk of ending in another colossal Armageddon.  Along the way consumers were never going to spend again, nobody was ever going to borrow or lend money again, the unemployment rate would never come down again, and we were likely to have another major banking failure, a secondary housing market collapse, a massive municipal bond default, a fiscal crises (going over the fiscal cliff), a blowup of the Eurozone, a hard landing in China, and a deflationary spiral led by collapsing oil prices;” according to James W. Paulsen of Wells Capital Management. 

Fear Has Fueled This Market

According to James W. Paulsen, the current market rally may again be the product of recently elevated investor anxieties.  Interestingly enough, when the market closed for Easter weekend, the S & P 500 Index had in six weeks essentially erased all its decline of the historical first six weeks of 2016, which set records for being the worst start to any year in American equity markets since 1942.

With fear setting the stage, Nick Murray says, “this was the second time in six months that—after nearly four years without a correction, and having tripled in six years—the market corrected brutally and as quickly recovered.  The result is essentially range-bound, languishing within five percentage points of its all-time high.” 

So, let’s look at more of the whole story and what key factors represent the real economy, significant milestones in our economic recovery: 

  • Median household income adjusted for inflation—the last missing piece of the recovery—is finally higher than at the point the Great Recession began in December 2007. According to James W. Paulsen, “The real wage rate in this country has been enjoying one of its most prolific and persistent advances of the post-war era.  As shown on Chart 1, the real wage rate (far from stagnating as suggested by most political rhetoric) has risen steadily since the mid-1990s, and this trend did not stop with the 2008 crisis.  Indeed, since the end of the last recovery (i.e., December 2007), the real wage rate (adjusted for inflation) has risen at an annualized pace of about 0.83%, one of its strongest periods of advance in at least 50 years.
  • According to the U.S. Bureau Labor Statistics the current rate is 5.0% and trending down, with an average of greater than 200,000 new jobs being created each month.
  • Household net worth meanwhile also has hit a new high—as it has regularly been doing. A key factor is the value of U.S. housing, which finally exceeded its housing-bubble high, nine years after that peak.
  • As James Paulsen indicated in early March the consumer price inflation has risen from 1.6% to 2.2%, with the services sector contributing most of this increase, while commodities have been in a steep decline, including the spectacular drop in oil prices—most significantly since mid-2014. But, now we begin to see evidence that crude oil is settling at about $40 a barrel (…the indication that supply and demand are in the early stages of reaching some sort of balance).

Most Likely Results 

The above key factors would indicate that slow stable economic growth is the most likely outcome for the U.S. economy over the near term to intermediate term.  Jim Paulsen, indicates……” that we oughtn’t to expect returns from mainstream equities above five to seven percent annually—at least until global growth restarts, which may take some time.” 

Further we may continue to see periods of high volatility, particularly when economic statistics, a geo-political event or some other world anxiety hits the headlines and markets worry.  So, in spite of such factors, we need to keep our long term view and invest accordingly. 

Recent commentary by Robert C. Doll, CFA, Senior Portfolio Manager, Chief Equity Strategist for Nuveen Investments……” suggests that, despite risks, their long-term outlook is positive. U.S. equities have rebounded sharply over past couple of months, with the S&P 500 Index rising by an impressive double-digit rate.  The gains are partly due to recognition that the economy is doing better than feared and the rebound in oil prices has also reduced worries over deflation and provided support for risk assets, including equities and high yield bonds.” 

In a recent report, LPL Financial also stated that the data suggests low odds of a recession in the next few years. 

Closing 

In closing and talking about risk, let me again share with you a quote from one of my favorite sources of wisdom, Warren Buffett, “It is better to be approximately right then precisely wrong.” 

We again thank you for your trust and loyalty.  It is a joy to have the opportunity to continue to serve you. 

Special Report No. 79  -- The Bear Market That Wasn’t…A Celebration of the Seventh Anniversary of the Bull Market 

Information contained within this report has been compiled from S&P 500 Index, LPL Financial, Nuveen Asset Management, Wells Capital Management, Sentier Research. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation(s) for any individual.  To determine which investment(s) may be appropriate for you consult your financial advisor prior to investing.  All performance reference references is historical and is not a guarantee of the future results.  All indices are unmanaged and may not be invested into directly.  Advisory services offered through LPL Financial, a Registered Investment Advisor. 

Investing involves risk including potential loss of principal.  Economic forecasts set forth in the presentation may not develop as predicted.  

No strategy can ensure or protect against loss.  There is not a guarantee that a diversified portfolio will enhance overall returns or out perform an non-diversified portfolio.  Diversification does not protect against market risk. (Tracking #1-488187)