The U.S. bull market staggers to its seventh birthday

The bull market celebrates seven years this month, but economists say that increased volatility and the decreasing effectiveness of economic “bazookas” to rally risk assets suggest the bull is running out of steam.

Nonetheless, the S&P 500 has managed to rally because the post-financial crisis lows of March 2009, even while a European debt crisis, a fiscal deadlock in Washington and a crash in oil prices have all threatened to finish the bull market over the years.

Global stocks fell right into a bear market last month, but the S&P 500 narrowly avoided doing exactly the same and it has since rallied from the February lows. Which means the bull marketplace is now 84 months long, the third-longest in history and closing in on becoming the 2nd longest, a record currently held by the 86 months of gains seen between June 1949 to August 1956.

Much of the present rally has been helped along by accommodative monetary policy from the U.S. Fed and easing policies generally around the world. But the punch that such policies had seems to be waning.

“The near-perverse market response to recent bazooka-like easing steps, beginning with the Bank of Japan and its negative rates and so the ECB this week, shows that we’ve almost reached no more the line for central banks supporting asset prices and/or undercutting currencies,” said Douglas Porter, chief economist at BMO Capital Markets.

Still, that does not suggest that the end is right around the corner.

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The record for that longest bull market is held through the 113-month rally seen from October 1990 to March 2000, a bull that BMO Capital Markets’ senior economist Robert Kavcic says has many parallels with the current environment.



Kavcic points out that in 1997, when that bull market was in which the current the first is today, the Fed had just hiked rates of interest by 25 basis points – because it did at its December meeting last year. But a sudden downturn in the global economy, exacerbated by the shock from the Asian Financial Crisis, forced the Fed to backtrack on its policy.

Kavcic said that any similar transfer of policy this season could extend the marketplace rally to rival the one from the 1990s.

“Global headwinds were also blowing through 1997, resulting in the Fed to put off its tightening cycle through the latter stages of the year (it raised rates once in March ’97), before eventually cutting rates 75 basis points in 1998,” Kavcic wrote inside a note to clients.

Economists had captured speculated if the Fed could be forced to halt rate hikes or even cut again following a wave of selling hit global markets in January and February, along with a 40 per cent crash in oil prices. Chairwoman Janet Yellen noted that “financial volatility” became an issue for the Open Market Financial Committee during a meeting in January.

But with markets rebounding, economists again are expecting the Fed will continue to hike rates this season. Holding off on rate hikes risks overheating the economy, because the U.S. labour market sits in a level the central bank considers full employment and inflation has recently begun to pick up.

 Kavcic also notes that the perils of halting hikes or perhaps cutting, such as what went down in 1998, would risk throwing risk assets in to the type of bubble that stop the 1990’s bull.

“Some will reason that, by 1997, the bull market would have rolled over when the Fed didn’t retreat from tightening,” he explained. “That shift, together with solid domestic economic fundamentals in the U.S., arguably helped fuel the final run-up in valuations through early 2000, which ultimately ended badly as monetary policy had to aggressively get caught up. We might be at an equally important stage of the cycle today.”

The Fed’s next policy meeting is going to be held from March 15-16, and markets are currently pricing in an almost zero percent chance that the central bank will hike rates. June’s meeting is seen as probably the most prone to see a hike, though analysts is going to be watching now to determine whether this type of move is going to be telegraphed in the Fed’s wording.

Financial Post

jshmuel@nationalpost.com