Why this history-making bull stock market may be on its last leg
MARKETWATCH 2:53 PM ET 4/22/2016
Analyst says 'raging bull to sitting bull to volatility bull reflects low probability of higher EPS and lower rates ...'
This Thursday, the bull stock market is poised to earn its place as the second longest run in history. And then what?
For clues on where stocks could be headed, Bank of America Merrill Lynch dug through more than a half century of data -- and the result is depressing for Wall Street.
The bull market from the mid-1950s "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," said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, in a report.
The scaling back of the Federal Reserve's expansionary monetary policy and stunted corporate earnings are the chief factors that could derail the stock market's upside trajectory, he said.
In the wake of the 2008 financial crisis, the Fed injected nearly $3 trillion in liquidity into the economy via three separate quantitative-easing programs. Those efforts officially ended in October 2014. Since then, the central bank has steadily signaled a desire to normalize monetary policy. The panel raised interest rates for the first time in almost a decade in December although Federal Reserve Chairwoman Janet Yellen recently stressed the need for caution (http:// www.marketwatch.com/story/yellen-says-caution-on-rate-hikes-is-justified-and-takes-negative-rates-off-the-table-2016-03- 29) with rates due to lingering global economic uncertainties.
Meanwhile, most assets have struggled to post returns since the Fed started to wean the economy from that easy money. A portfolio of 50% equities, 35% bonds, 10% commodities and 5% cash would have fallen 3.4% since the end of QE3, according to Hartnett. Profitability in the corporate sector has also started to fade in recent quarters, even accounting for the weakness in the energy sector.
"Our shift in recent years from 'raging bull' to 'sitting bull' to 'volatility bull' reflects low probability of the higher EPS and lower rates in coming quarters," he said.
Hartnett's prediction for a latent "taper tantrum" -- the common phrasing for the market's bearish reaction to a reduction in stimulus -- hinges on the sheer amount of funds that global central banks pumped into the global economy since 2008.
Indeed, Societe General global strategist Albert Edwards bemoaned what he views as central banks' ineptitude.
"I feel utterly depressed," wrote the perma-bear in a note to investors. "I have not one scintilla of doubt that these central bankers will destroy the enfeebled world economy with their clumsy interventions and that political chaos will be the ugly result."
Edwards' main point is that the central banks' generosity over the past few years has done nothing for the economy other than to inflate asset prices and make the rich richer.
"The only people who will benefit are not investors, but anarchists who will embrace with delight the resulting chaos these policies will bring!"
Then there are uber-optimists, like Jeffrey Saut, chief investment strategist at Raymond James, who on Friday predicted that the current rally has another seven to eight years of mileage left based on buoyant sentiment and average cash positions of 15%.
"These are not the metrics seen at bull market tops. Yes, there will be pullbacks, but as we have advised for seven years, they are for buying," he said in his monthly outlook report.
The longest bull market on record lasted 3,452 days from October 1990 to March 2000. The next longest was 2,606 days old that lasted from June 1949 to August 1956. On Thursday, the current rally will pass its predecessor from 60 years ago by one day to become the second best, according to Bank of America.
-Sue Chang; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
04-22-161453ET
Copyright (c) 2016 Dow Jones & Company, Inc.
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