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In this podcast, Client Communications Group Vice President Naj Srinivas speaks with Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher about the past 10 years of this bull market—including how it started, how it has progressed and whether there is still more room to run. Recorded March 14, 2019.
00:57 – Bull market length
01:45 – Sentiment curve
02:35 – Bull market depressants
02:50 – QE misunderstandings
03:40 – Effects of money supply, PIIGS and Trump
05:03 – Biggest surprise of this bull market
06:30 – Media and investor sentiment
08:45 – How much longer can the bull market go?
10:45 – Volatility and investor sentiment
12:00 – 2019 forecast
14:00 – Presidential 3rd years
16:10 – 2018’s effect on 2019
On March 9, 2009, a global bull market began. A decade—and multitudinous predictions of its demise—later, the bull still seems on solid footing. Its 10-year anniversary, though an arbitrary marker, is a timely reminder of how powerful and resilient bull markets are.
This “bulliversary” milestone does come with a caveat: Both global and US stocks remain below the record highs set before last year’s correction. The MSCI World last registered an all-time high on January 26, 2018, while the S&P 500’s most recent record was September 20.[i] Though stocks have rebounded significantly, the S&P 500 and MSCI World remain -3.1% and -4.7% below their last highs, respectively.[ii] We suspect last year’s drop was a correction, which ended around Christmastime, and think it is only a matter of time before both gauges register new highs. Short-term negative volatility could always knock markets again, dragging this out. But we see little fundamental reason to think the bull is over now.
Presuming that holds true, this bull’s 120-month run is the longest on record—eclipsing the 1990s bull’s 113 months. It is a trivial milestone, but inevitably rekindles the long-running debate: Is the bull long in the tooth and on its last legs, or can it keep on trucking? But in our view, bull markets don’t die from old age. Based on our research and understanding of the stock market, bulls die in one of two ways: what we refer to as “the wall” or “the wallop.” We don’t see either as likely in the here and now, suggesting this old bull should keep running.
The ECB is stimulating! Or at least that is how it and the media are portraying President Mario Draghi’s recent decision to renew the central bank’s “targeted long-term refinancing operations” (TLTROs). Media have speculated for weeks this would happen, describing it as a “major policy reversal” and a “U-turn.” We think this gives the ECB too much credit. Thursday’s announcement largely extends the status quo—an unnecessary move, in our view. While couched as stimulus, we think it was really designed to defang a false fear: maturing TLTRO loans.
First, understand: TLTROs are not quantitative easing (QE). Under QE, the ECB bought long-term bonds to reduce longer-term interest rates. By doing so while fixing short rates just below zero, they reduced the difference between short- and long-term interest rates. Because banks borrow short term to fund long-term loans, this reduces profits on future lending. By contrast, TLTROs let banks borrow funds for a fixed period directly from the ECB at discounted rates, providing they use them to underpin loans to businesses and consumers.
This isn’t the first time the ECB tried extending cheap funding to banks. TLTROs’ predecessor was 2011’s longer-term refinancing operation (LTRO), sans the first T, which didn’t require banks to lend the funds. Amid a debt crisis and recession, banks scrambling for liquidity took out over €1 trillion in three-year LTRO funds. When LTRO repayment approached in 2014, the ECB introduced the first TLTRO with four-year maturities, allowing banks to roll over their LTRO funds if they put them to work. Banks took €430 billion. In 2016, rather than wait four years, the ECB launched TLTRO-II—another four-year facility—which permitted greater borrowing at lower rates for new private sector loans. Banks not only rolled over most of their TLTRO-I funding, but they increased it to €739 billion. Repayments for TLTRO-II are now poised to start coming due in the next 12 – 18 months. The ECB’s announcement it will offer two-year funding should allow banks to roll over funding once again.
The UK’s Parliament conducted its latest “meaningful vote” on Brexit Tuesday. On the bright side for Prime Minister Theresa May, who won a few concessions from Brussels overnight in hopes of rallying lawmakers to her side, more members of Parliament (MPs) voted for her deal than in the last vote. On the not-so-bright side, the No votes dropped from 432 to 391—still far exceeding the 242 Yes votes. For markets, this widely expected defeat merely extends the status quo of Brexit uncertainty. We remain of the opinion that the sooner this all ends, the better—regardless of the actual outcome—so that investors and businesses can get on with life. But the road there could go a number of ways.
On paper, the next steps are as follows:
Exhibit 1: Your Handy Brexit Vote Flowchart
Lately, economic worries have most seeing trouble in almost every data release. Last week was no exception. Yet two data points published last week—which, at first blush, seemingly support slowdown fears—actually have some interesting twists when you take a closer look. Here is a quick rundown.
Eurozone GDP Slowing Has a Silver Lining Most Missed
While most media focused on the ECB’s new “stimulus” (which is nothing of the sort, in our view), they seemingly overlooked the revised Q4 GDP data, published the same day. This report didn’t change headline growth—it was still a slow 0.2% q/q (0.9% annualized)—but it added detail lacking in the preliminary release.[i] The upshot: Consumer spending, business investment and trade all added to growth. Sum them up and you get 0.4% q/q GDP growth. Adding in government spending bumps it to 0.5%. So what dragged growth down?
With Italy slipping into recession in Q4—and Germany narrowly sidestepping one—the common narrative in the financial press seems to be that the overall eurozone is teetering on the brink of a downturn. They see any hint of weakness in data as a sign of its approach. But February’s Purchasing Managers’ Indexes (PMIs)—released last week—suggest eurozone economies are in better shape than this popular portrayal.
PMIs are surveys measuring growth’s breadth—the percentage of firms reporting growth. They are quite timely, given their monthly frequency and quick publication after month-end. And the questions include forward-looking ones regarding new orders. Useful! But, like all economic data, they aren’t perfect. They don’t give you a sense of growth’s magnitude. If a minority of firms grow or contract a lot, output measures like GDP and breadth measures like PMI can disconnect.
Eurozone composite PMI (manufacturing plus services) rose to 51.9 from January’s 51.0. Readings above 50 mean more firms grew than contracted, so February’s read implies broader growth. It also topped the preliminary estimate, 51.4, a nice surprise.[i]
A shutdown-delayed data release showed the US trade deficit rose 18.8% m/m in December to $59.7 billion, the largest gap since October 2008.[i] For all of 2018, the deficit rose 12.5%—also landing at a 10-year high—while the goods trade deficit reached an all-time record.[ii] The figures spurred much politicized chatter, but we don’t think they signal anything concerning about the US economy or stocks.
The trade deficit garners way more attention than it deserves, in our view, as it is a meaningless statistic. Whether rising or falling, it doesn’t reveal useful information about the economy’s health. It also creates confusion. Contrary to what the name implies, the trade deficit doesn’t reflect a growing sum the US must repay or the hollowing out of domestic industry. Rather, it is the result of individual Americans’ opting to buy more goods and services from international sellers than individuals elsewhere opt to buy from the US. These transactions create no obligations. The fact they occur across international borders doesn’t change this. No one worries about the consequences of New Yorkers purchasing more from Virginians than the reverse.
The record goods trade gap is also natural considering the US has evolved over time into a services-driven economy, with a manufacturing sector focused on high-tech machinery. Conversely, some countries overseas tend to focus more on the cheaper consumer goods Americans gobble up. In other words, the goods trade deficit is a sign of specialization. It shows consumers’ and businesses’ collective buying and selling decisions are allocating resources to each country’s economic strong suits—a marker of efficiency, not imbalance.
This morning, robocallers decided to spam one of your friendly MarketMinder editors, leaving her the following voicemail five times in four hours:
is to inform you that we just suspend your Social Security number because we found some suspicious activity. So if you want to know about this case just press one thank you. [three-second pause] This call is from the Department of Social Security Administration. The reason you have received this phone call from our department is to inform you that we just suspend your Social Security number because we found some suspicious activity. So if you want to know about this case just press one thank you.
Predictably, the entity leaving the message wasn’t a human, but a voice from text-to-speech software. Someone typed in a message, including grammatical errors, and then had a computer program morph it into an audio message, which they are now spamming across the US. When we Googled the voicemail, we saw numerous local news outlets reporting the scam over the weekend. The goal appears to be for you to press “one” and either give someone your Social Security number or buy a bunch of gift cards to pay them to clear up the problem. According to a late-December FTC blog post, 35,000 people reported falling for the scam last year and losing about $10 million collectively. That is small potatoes at this juncture, assuming the figure is accurate. But in an effort to preempt this snowballing and catching any of our readers, we figured it was worth a post.
China is slowing! We know, we know, that isn’t exactly breaking news. For much of the last year, data showing downticks in the Middle Kingdom’s economic growth rate have resurrected (again) Chinese hard landing fears, with many fretting global fallout. Now, growth is slower, and we think weakening private sector demand from China weighed on developed world export growth in late 2018. But it seems like a mistake to us to extrapolate this forward. Chinese authorities have many ways they can boost growth—and they have enacted some. Yet many seem skeptical China’s moves will do much. However, loan growth’s January surge hints at the impact coming soon.
Although many believe the trade dispute between the US and China is driving China’s slowdown, we think it stems mostly from Chinese policymakers’ crackdown on China’s “shadow banks” last year. These non-traditional private lenders predominantly financed small and midsize firms, which make up most of China’s private sector and drive economic growth. When private sector funding dried up, the economy slowed more sharply than many expected, goading action from China’s leaders. That action entailed a slew of measures, including roughly $200 billion worth of fiscal stimulus, another $125 billion earmarked for urban rail projects, $200 billion in local government bonds funding infrastructure—allowing municipalities to issue them ahead of schedule—and a variety of tax breaks worth approximately $300 billion.
China is also employing monetary stimulus. China’s central bank—the People’s Bank of China (PBoC)—cut the reserve requirement ratio (RRR) for large banks from 17% last year to 13.5%. Small banks’ RRR is down from 13.5% last year to 11.5%. This means China’s banks have more capacity to lend. But that doesn’t automatically direct funding where it is most needed, as banks tend to prefer lending to large state-owned enterprises, which have an implicit government guarantee. So the PBoC set up a lending facility effectively subsidizing credit to private small and medium-sized businesses. Skeptics wonder why data largely don’t show an effect, perhaps seeing it as a sign the measures are feckless. But this was never going to hit the economy right away. Monetary policy typically hits at a lag. However, January lending data suggest it is starting to fertilize some green shoots.
Q4 GDP hit yesterday, about a month later than usual due to the government shutdown. There weren’t any big revelations, with growth continuing at a fine rate and matching expectations. But the accompanying negative outlook from pundits suggests a low bar for economic reality to clear this year to boost stocks.
First, the numbers. GDP rose 2.6% annualized in Q4, slowing from Q3’s 3.4% as forecasters anticipated.[i] Consumer spending—69% of GDP[ii]—rose 2.8% annualized (slowing from Q3’s 3.5%). Business investment also contributed, accelerating to 6.2% from Q3’s 2.5% as investment in intellectual property products jumped 13.1%. Meanwhile, residential investment declined -3.5% annualized, its fourth straight negative quarter. Not great news for that sector, but not a huge driver of overall growth, as residential real estate is just 3% of GDP.[iii] Even with its decline, total private sector demand (e.g., consumer spending, business investment and residential investment) rose 2.6%. (Exhibit 1) Meanwhile, exports and imports rose 1.6% and 2.7% annualized, respectively, signaling the US economy’s resilience to China’s slowdown, which knocked trade throughout Europe and Asia in Q4.
Exhibit 1: GDP and Private Sector “Core GDP”
Source: Bureau of Economic Analysis, as of 2/28/2019. GDP and “Core GDP” consisting of personal consumption expenditures, private nonresidential fixed investment and residential fixed investment, Q1 2015 – Q4 2018.