Happy anniversary!

By Guest Blogger Ryan Lewenza

Break out the champagne…the current bull market hit its 10 year anniversary last week! Who would have thought that the S&P 500 would go on to return 400% including dividends following that historic financial crisis and bear market. During that period the entire financial system was on the brink of collapse, the US economy was shedding over 700,000 jobs per month, and nearly $8 trillion in US stock market wealth was wiped out. I get panic attacks just thinking about.

Well things sure have changed since those dark days. The US economy has added 20 million net new jobs since 2010, total US net worth has increased by $47 trillion and since the financial crisis low of March 9, 2009, when the S&P 500 bottomed at 666, the S&P 500 has returned a staggering 400% including reinvested dividends or 17.5% annually. Where does this stack up with the rest of the bull markets? This bull market is now the second longest on record at 120 months. The only bull market to best this is the 1987-2000 bull market, which lasted 150 months and saw the S&P 500 return 723% including dividends. In this week’s blog we review the main factors that have supported this amazing bull market and discuss everyone’s favourite topic – can it continue?

The S&P 500 Has Returned 400% since March 2009

Source: Bloomberg, Turner Investments

While there have been a number of factors that have contributed to this great bull-run I believe the key ones include:

• A slowly improving US economy. Since the end of the financial crisis in 2009, the US economy has grown at average 2.1% GDP growth rate. This is below the long-term average of 3.3%. Now this is where the bears get it all wrong. They think that because of the half-speed recovery since 2009 that this bull market is not supported by strong economic fundamentals and given this the stock market is doomed. But I think they have it totally wrong. Due to the slower economic growth and low inflation levels, the Federal Reserve has been able to take a very gradual approach to hiking interest rates, which has elongated this business/market cycle and greatly contributed to the phenomenal market gains. Basically growth has been “not too hot, not to cold”, which are ideal conditions for the equity markets.
• Second, as a corollary, S&P 500 earnings have surged from $55/share in 2009 to $150/share today. This equates to a 170% increase in earnings, which accounts for 43% of the total return (dividends account for 80% and P/E expansion the remaining 150%) since 2009.
• The third driver of returns has been the massive monetary stimulus provided by the Federal Reserve. This includes the Fed taking interest rates down to 0% (now at 2.5%), and the huge expansion of the Fed’s balance sheet, which has grown from US$800 billion in 2009 to over US$4 trillion today. Without a doubt this Federal Reserve monetary largesse has greatly contributed to the stock market gains.
• Lastly, the US banks, where most of the problems originated from, are in much stronger shape today having de-risked their balance sheets and increased their capital ratios. The tier 1 capital ratio measures a bank’s financial health and calculates the percentage of capital to a bank’s total assets. Below is a chart of the average tier 1 capital ratio for the major US banks and following the 2009 financial crisis the banks have worked hard at increasing this ratio. The US banks are in solid financial shape these days and a key reason why I believe the next economic downturn and bear market will not be nearly as calamitous as the 2008-09 financial crisis.

US Bank Tier 1 Capital Ratios

Source: Bloomberg, Turner Investments

Now to the more important matter, can this bull market continue?

On a shorter term basis we believe the Federal Reserve backing away from their rate hikes this year and Trump seemingly close to signing a trade deal with China, that this will be very supportive to the equity markets this year.

Next up is how close are we to a recession? This is critically important since most bear markets are brought on US/global recessions, and we just don’t see it for 2019. Could it happen in 2020 or 2021? Sure, but let’s not put the cart before the horse.

As covered in previous blog posts I have developed a “recession monitor”, which looks are key economic and market indicators that have done a decent job forewarning of US recessions. This list includes things like initial jobless claims (they typically spike ahead of recessions), the ISM manufacturing index (it typically rolls over and declines below the key 50 level) and the US yield curve (it inverts before recessions and bear markets). None of these indicators are flashing red suggesting an imminent recession. Some are yellow (the yield curve) and require close monitoring, but the bulk of our indicators remain positive and suggests continued growth in the US economy.

Recession Monitor List

Source: Bloomberg, Turner Investments

Finally, a major reason why I have been bullish on the US markets since 2009, and particularly since 2013 when the S&P 500 made a new all-time high, is that I believe that the US equity markets trade in long-term or “secular” bull and bear cycles.

Look at the chart below. It’s a long-term chart of the Dow Jones Industrial Average and it clearly shows these long-term bull and bear cycles, which last roughly 15 years on average. The most recent secular bull cycle lasted from 1982 to 2000, followed by a secular bear cycle from 2000 to 2013. When the S&P 500 broke out to new all-time highs in 2013, this started the next secular bull cycle, in my opinion. If correct this could mean US stocks have the wind behind their sails well into the 2020s. Now let me be clear, this does not mean that stocks will not endure major sell-offs and bear markets. They will! The business cycle has not been eradicated. But if I’m correct, it does mean that US stocks will continue to post solid returns over the next decade. Wouldn’t that be nice!

Secular Cycles of the Dow Jones Industrial Average

Source: Bloomberg, Turner Investments

So there you have it! I see the US economy continuing to expand this year and see low odds of a recession. This should support further market gains over the next 9-12 months, and longer-term (next decade) I see continued healthy returns based on these supportive secular market cycles.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.