Bull markets die of excesses, not necessarily old age. There are still some signs that say this bull market and economic cycle have a lot of growth left.- Ryan Detrick, Senior Market Strategist for LPL Financial
The bull market may be about to become the largest in history, topping the record run from the 1990's. There are some valid arguments over if this is really the longest ever, but what we continue to agree here at LPL Research is that it could continue thanks to strong corporate profits, increasing confidence, government spending, and tax reform.
Turkey has been all over the news recently, as its currency and stock market continue to crash. Is this the first domino to fall that will create chaos in other emerging markets and potentially around the globe? We don't think so, as many of Turkey's issues are self-inflicted. Remember, Turkey makes up about one percent of global Gross Domestic Product (GDP) and only about half a percent of the overall weight of the Emerging Markets Index. Nonetheless, this is one area we will continue to watch closely.
Also discussed: how earnings continue to drive growth, what to expect at the Jackson Hole Symposium later this week, why mid-term years tend to be quite volatile, and what to make of the proposal for companies to only report earnings twice a year versus the current every quarter format.
On August 22, 2018 this bull market can become the longest in history. With strong corporate profits and improving confidence, there could be room for future gains.
Disclosure: All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
Emerging markets earnings estimates have come down recently as trade concerns heat up. The good news is double-digit growth over the next year may be a reasonable expectation.
Disclosure: All indexes are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted.
Emerging markets have significantly lagged other global markets this year, down 12% in 2018 versus the S&P 500 up 7%. The weakness has been more pronounced the past few months as trade worries heat up.
Disclosure: All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing involves risks including possible loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
The MSCI EAFE Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australia and the Far East. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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John Lynch: From LPL Financial, welcome to Market Signals. I'm John Lynch.
Ryan Detrick: And I'm Ryan Detrick. We're long in the tooth, but as we're going to talk about in this series, just because bull markets are old, that don't mean you have to die. We like to say in LPL Research bull markets die of excesses, not necessarily old age, and there's still some signs that say this bull market and economic cycle have a lot of growth left.
John Lynch: Clearly, we have some big news to discuss and share with investors this week. We've had what appears to be the longest bull market in history. There is some debate on that. We can talk about that, and certainly Turkey. Any other issues that we should discuss?
Ryan Detrick: Well, John, I guess the only issue in my life was it was the first day of school, my wife was crying a little bit this morning as the kids went off. Other than that, markets are wild. There's a lot of activity, a lot of fun, but on the home front things are a little volatile in the Detrick family as well.
John Lynch: More volatility at home with the kids, yeah. We're in a different stage now. We're empty nesters, so we're trying to keep active in other ways, so all good. Certainly, let's start off with the bull market because I know investors are interested, concerned, wondering whether or not where we are relative to duration and magnitude. Clearly, the 1990s was a great bull market, but on Wednesday, August 22, many say this will be the longest bull market in history. Why don't you share a little bit about that.
Ryan Detrick: That's right, John, so that's the bottom line. Since March 2009 to this Wednesday, it'll be officially the longest bull market ever. Now, let's take a, let's remember though, the last time the S&P had a new all-time high, John, was January 26th of this year. One could argue we're not technically still at, the bull market's not still alive. Maybe it peaked back then, is what I'm trying to say. Now, the bull, the S&P is what, a half a percent away from all-time high as we're doing this recording-
John Lynch: That's right.
Ryan Detrick: So there's a very good chance it's going to get there. Different ways to look at this, we had an intraday 20% correction in 2011, not on a closing basis, so we're playing with some numbers there, but the most important thing I think to remember for investors is just, yes, we've had that correction, we had a big correction in 2016 when the median S&P 500 stock was down about 25%, energy financial was cut in half. We've had some bear markets during this nine-year run, and that's important to remember. As the economic cycle ages, we're going to have more volatility, we'll talk about that. It's still been a very, very impressive ride nonetheless.
John Lynch: Hasn't it been? August of '11, with the Treasury debt downgrade, October of '11, we tested those lows, and then again, obviously, with the oil concerns in early February. It's been quite a run, 2017 was clearly a very narrow trading range with intraday volatility and certainly with what we experienced this past March and what we've experienced in this past April, February and April of this year, clearly volatility has returned. It is exciting, nonetheless, and we'll see how far it goes. Now, if we go purely duration, I think we need to make the distinction for our investors. We'll go the longest in duration Wednesday, August 22, 2018. But from a magnitude standpoint, we still have further to go. Correct?
Ryan Detrick: That's right, John. Now, this is purely price, so not total return, but on a purely price-basis, the 1990s bull market was up 417%. This current bull market, we'll call it approximately 320%. Is it truly the greatest bull market ever? Probably not. It might be the longest bull market ever, but there is a distinction there.
John Lynch: Well, there's still hope, investors, and we'll count on that. The economic expansion would be the longest going into next year, right? I think it's next summer of '19 would be the-
Ryan Detrick: I believe it's next June is when we crack the longest there, so it's the second longest. That's since World War II at least, but absolutely. We're long in the tooth but, as we're going to talk about in this series, just because bull markets are old, that don't mean we have to die. We like to say in LPL Research, bull markets die of excesses, not necessarily of old age, and there's still some signs that say this bull market and economic cycle have a lot of growth left.
John Lynch: The excesses are really important because I'm afraid all too often too many people focus on 2008 as opposed that is the repeatable constant. We really don't see that now that we don't have the excess leverage that enabled the economy to grow 5% or 6% in the early August, nor do we have the leveraged risks that could take us down by a similar amount. I think investors need to keep that in mind. When you're thinking also about duration and magnitude of expansions and bull markets, the typical bull lasts about five years and is up 150%. Even though this 320% price gain in the current bull fails to match what we have experienced in the 1990s, it's still a pretty good number, and investors need to appreciate that as well. I'm sure they do.
Ryan Detrick: Well, let's hope they do, absolutely. You talk about excesses, the one I like to mention that's easy to understand, you'll get inflation of wage growth, John. Before the last three recessions, year-over-year wage growth cracked 4%, and soon after, between six to nine months later, we had a recession. Well, wage growth currently is around 2.7%, I believe.
John Lynch: That's right.
Ryan Detrick: ... so that's just one example of it. But again, there are not simply, there simply aren't the excesses we've seen of major market peaks, and that's why this economic cycle can continue.
John Lynch: I'm glad you mention that because we've seen some inflation data recently that has talked about "approached 2.9% on headline CPI", consumer price index. We've seen 2.4% on the CPI index when you exclude the volatility of food and energy pricing. My concern is that the discourse is kind of suggestive that that's a number that's going to cause the Fed to slap on the brakes, and I think it's important for investors to appreciate that the Fed has a mandate, two mandates. One is to keep a lid on inflation and the second is to ensure as full an employment situation as possible. The price stability aspect, the Fed's target is 2% for price stability, not runaway inflation, and I think that's so important to keep in mind.
When you talk about 2.7% on the wage number, we all like to emphasize to our investors that wages represent 70% of business costs so it's really hard to have a persistent inflationary threat without the participation of wages. I think the Fed's unofficial mandate has to do with the currency. Our dollar can't get too strong, which would result in emerging currencies getting too weak, which would make emerging currencies run into difficulty servicing existing debt, which is a good segue to what we want to talk about next, the crisis in Turkey.
Ryan Detrick: That's right, John. Let’s talk about the crisis in Turkey, I'm going to ask you a few questions here. It all spurred up, I guess, technically, two Fridays ago when it became well known there's issues in Turkey. But you look at the price action in Turkey, you look at some of the things going on, they've been, their currency's been in a lot of trouble for a long time. Their stock market's been in trouble for a long time. It's cut in half. I mean, is this really just out of left field, or should we have seen this coming the whole time?
John Lynch: Yeah, I think, unfortunately, it's not necessarily economic or financial, there's a lot of political situation also, right? There's a, investor concern has become more prevalent relative to President Erdogan's power and his oversight of their central bank, which is run by his son-in-law. There's been a lot of concern over the experience they had in 2000, 2001. They were able to secure a lot of financing once they released restrictions on foreign investment, and that fueled a boom times. It was among the best, if not the best, emerging market GDP performer for several years there. That always works until it doesn't, right? How does one go broke, as Hemingway said, "Gradually, then suddenly." You had this great pattern, now all of a sudden suddenly people are concerned about his sway over the central bank. It's becoming very clear with the lira weakness that they're going to have difficulty servicing debt over $220 billion in corporate debt alone, so that's something to keep in mind.
Ryan Detrick: John, you're right. Obviously, it's a small country. I think I saw it's less than 1% of total GDP around the globe. Turkey makes up about half a percent of the overall market weight of the emerging market index, so it's small. But that's the thing, right? Is it the first domino to fall? Remember, it was 1997, the Thai baht? We had the issues in Thailand. Small country, people maybe didn't think it'd be a big deal, and it did spread, the Asian contagion. US market corrected not 20%, right around there. But could this be the first domino to fall to really hurt other emerging markets, and maybe the global economy in general? What do you think, John?
John Lynch: Yeah, there's always a concern, right? You never want to be dismissive of any of the risks out there, but if you look at the Mexican peso crisis in 1994, the Thai baht crisis in '97, in '98, emerging market volatility escalated, right, down by a third in '94, down by almost two-thirds, more than a half at least, in the late '90s, and the S&P 500 kind of hung in there. To the degree we like to say there is a coupling of the global economy, in many respects there's been a decoupling. Now, if, and you also had different currency, who was hedged against the dollar and who was pegged to the dollar in the late '90s compared to what we're seeing with the lira today currently. The lira's down about 40%, for perspective. Our dollar has certainly gained some strength. Other factors, keep in mind Turkey is still going to grow almost 4% this year. Projections are still for 3% growth next year. Now, they have 15% overnight borrowing rates in that 15% to 17% range.
If you think about that, I think the important thing for our investors in the way we'll be positioning portfolios in our investment strategy is to really delineate between those with current account deficits in the emerging space and those who have current account surpluses, those that are manufacturing and export-driven as opposed to those with services, and I think if you're able to make that distinction and recognize the percentage impact to global economy or to the emerging markets equity index, I think that will be an important distinction. I think you'll ultimately be able to see a pivot in the emerging space as we get some clarity because the real big deal is the trade deal with US and China.
Ryan Detrick: That's right, John. As of Friday, emerging markets down about 12% year-to-date, S&P up about 7%, so we're seeing a pretty wide fish mouth, so to speak, in terms of the differences there. You mentioned the 4.1% GDP growth expected in Turkey this year. I thought that was kind of fascinating when the US is maybe around 3% or so. Also, emerging market earnings are still, they've been coming down a little bit over the last month or so. We're still looking at double-digit EM earnings growth this year, and valuations, I mean tell us a little bit about valuations. They're pretty good, still solid in emerging markets, right?
John Lynch: About a quarter, if not a third, lower than what we're seeing in the developed marketplace. Again, never want to be dismissive of market risks out there, but when you're positioning diversified portfolios and focusing on the long-term, my favorite data point on the emerging markets is six billion people, and you multiply six billion times anything and you're going to get a pretty big number. If you're able to look at that relative to attractive valuation, strong earnings growth, flexibility in their economic models where they're largely absorbing the transition from 10% GDP to 6% GDP in China and embracing that.
Ryan Detrick: That's right. You mentioned six billion people. One stat I read in Barron's this year that I will never forget, it was powerful, one billion smartphones will be sold this year, 70% of them will be in emerging markets. Think about that. Now, the other thing, John, last week, if you look under the surface, kind of intermarket analysis, gold was down. This was a true, we're not minimizing it, this was a true crisis going on. You'd think gold would have probably increased last week and that obviously wasn't the case. S&P was up, Dow was up. I mean, we had gains last week in the US and gold was down. If someone just saw that, you wouldn't be so concerned, but the headlines were pretty scary.
John Lynch: Absolutely. It's interesting about gold. I looked over the weekend and gold was also down during the Mexico peso crisis and the Thai baht crisis, so it's kind of curious how what's this perceived safe haven hasn't necessarily lived up to its billing. What I'm most concerned about is that copper has slipped. I'd like to think copper is more a function of dollar strength emerging currency weakness until we work out the China trade situation. That may not happen until after the election because President Xi has a job for life, whereas leadership in Washington is really counting on this November.
Ryan Detrick: Yeah, talking about copper, just a couple months ago it was breaking out to nearly new highs for the year and now it's in a bear market, some of the headlines are talking about copper in a bear market. Yeah, we're watching that one, but from a point of view, I do wonder if there's a flush coming here in copper and emerging markets with a lot of negativity, obviously well-deserved. Think about retail 12 months ago. No one wanted to buy retail. What's been one of the strongest groups the last 12 months? Retail. It makes you wonder if emerging markets, because everyone hates emerging markets now, could that be a contrarian low-expectations buy the next 12 months? I think it could be ripe for that.
John Lynch: Absolutely, absolutely, something investors should keep in mind, and domestically, never short a dull market, and certainly an argument for diversification. Well, let's transition to the lightning round before we close up shop with today's podcast. First off, let's talk about earnings. Second quarter earnings came in, another 25% gain, 9% revenue growth. What are your outlook for earnings?
Ryan Detrick: Well, John, you're right. Just on July 1st, S&P 500 earnings we're expected to be up about 25% year over year for the second quarter. Now, it's coming in just under 25%, right around where we were in the first quarter. All in all, you have to think, what drives long-term gains? It's earnings. Going back to the 1991, the S&P 500's been up 10% or more in terms of earnings, 12 times higher every single one of those times. We're looking at strong earnings this year, about 20%. Expectations next year are double digits again. Yes, there are all these concerns out there, but earnings estimates in the US have increased over the past month, and in the midst of all these trade worries and concerns, earnings still look really solid here.
John Lynch: That's a curious aspect. We had an experience in the mid-80s and again in the mid-90's, in maybe '84 and '94, where we had very strong GDP, north of historical averages, where we essentially had a market that failed to keep up with earnings growth in that strong period. Maybe you're just in this little consolidation period. The ensuing years, though, saw very good growth, so I think that's something we need to keep in mind as well.
Ryan Detrick: That's right. John, lightning round number two question, this one goes to you. Two big events this week, we have the Fed minutes coming out, but then Jackson Hole, where we have a new Fed chairman and it's his first real chance under the spotlights of the Jackson Hole Conference, or Symposium I guess is what we'd call it. What do you think is going to happen maybe with the Fed minutes briefly, but then Friday with Jackson Hole?
John Lynch: Yeah, Jackson Hole, for those of you who are unaware, Jackson Hole is the world's leading, or Davos may be up there also, certainly, but it's a conference with the world's leading economists and policymakers. With the world's leading economists there I always kind of question what kind of buffoonery goes on at the hotel bar over that conference, but nonetheless, we have to mindful some of the speeches that we've made. It's not really a policy-setting conference, but it's more of a policy discussion conference. In years past, they've talked about changes in the structure of the financial markets, certainly constantly concerned about inflation.
Yes, Jerome Powell will be making his big speech this week. I think it's important to recognize that I think we were blessed to have Ben Bernanke at the time we had him. I think we were blessed to have Janet Yellen at the time we had her. Jerome Powell is not burdened with the expectations of a PhD in economics. He is more of a market-savvy leader of the Federal Reserve. I think that's going to be terribly important to keep in mind to really see whether or not market signals are suggesting the Fed should stop, and I think that'll be very important. It'll also be important to see what he has to say about wage inflation because he has made some comments in recent Q&A sessions about his concerns relative to whether or not there's too much inflation or not enough inflation. I think that's something that really scares monetary policymakers.
Ryan Detrick: That's right, and I'd like to thank you, John. I know you were invited to the Jackson Hole this year and you turned it down to stay in the office with us, so I appreciate that.
John Lynch: I'm sure the invitation got lost in the mail.
Ryan Detrick: That's right.
John Lynch: Well, what about when you get presentations like this, that can add to some volatility, Ryan? We are in the dog days of summer, in August right now, and we have mid-term elections coming up. You've done some great work over the past year highlighting to our investors the importance of recognizing that volatility escalates leading into a midterm, but 12 months thereafter things tend to shake out. Why don't you share a little bit about that?
Ryan Detrick: That's right, John. Yeah, I'd like to start it like this. We were spoiled in 2017. I mean, there were only eight days that had a 1% either up or down day for the S&P 500 on a closing basis. This year, when we had that first 10% correction in nine days in early February, it caught everyone off guard even though we said expect more volatility. We've had two 10% corrections so far this year, John, but, and again it's a mid-term year. You look back in history, mid-term years, sure enough, see about a 17% from peak to trough intrayear pull back which is the largest out of the four-year presidential cycle, but like you said, if you're willing to hold, every single mid-term year low since World War II was higher 12 months later, and the average returns up close I believe over 30%.
If you think February of this year were the lows for the year, which we think they probably were, very good chance it's going to be higher, maybe even see some more gains before next February comes around a year later. Expect volatility, and hey, where are we, like you said, dog days of summer, August, September, October, three months, you definitely can see some downside volatility during a mid-term year, but still, all in all, the fundamentals and some of the technicals still suggest that prices will still be higher before the end of the year.
John Lynch: Excellent.
Ryan Detrick: John, the last question that we have for you here in the lightning round, the administration has proposed, just recently, earnings reports maybe twice a year. We all know earnings four times a year, right, companies four times a year have earnings. But the administration said maybe let's just do it twice a year. What do you think about that? That would be a major change for our industry, and pretty powerful.
John Lynch: Absolutely. That's something we all should keep in mind. We continually emphasize to investors, "Focus on the long-term." We have how many CEOs out there who publicly are in a position, and CFOs out there, who are publicly in a position and under the duress of hitting a quarterly earnings number. I think part of the concern there is whether or not companies with a quarterly focus can truly make those investments that may cause them to take it on the chin in the near-term, but exponentially generate better profitability in the longer term.
I think it's a healthy discussion, an awful lot of minutiae to consider, but they do do this in Europe, and it has worked relatively well over there, so I think it's something we should definitely keep in mind. I'm kind of curious to see, it's only been recently announced, but part of the concern, for example, with share buy backs to meet quarterly numbers and stuff like that, you wonder to what extent will this cause businesses to invest in Cap X, one of our major themes for 2018 and 2019, to the degree businesses spend on capital or expenditures take advantage of recent tax policy that can enable an acceleration for immediate expending of business investment. I think that will be a very important combination. If you have that as a 1, 2 punch, immediate expensing benefits over the next four years, plus an emphasis on longer term numbers by reporting only quarterly, that may have very positive long-term benefits for the market.
Ryan Detrick: Yeah, you mentioned Cap X. I mean, Cap X leads to more productivity. More productivity can lead to higher wage growth, and that all can lead to a longer extension of the economic cycle. More productivity can lead to higher wage growth, and that all can lead to a longer extension of the economic cycle. Productivity in the second quarter just came in last week to the strongest number we've seen in about three years, so productivity could be starting to come higher. Now, John, I've got a bonus question. You didn't see this one coming because I didn't tell you about it.
John Lynch: Mm-hmm.
Ryan Detrick: Who you got? The Eagles Band, or Michael Jackson?
John Lynch: The Eagles band or Michael Jackson?
Ryan Detrick: Which one do you like?
John Lynch: Well, I'd have to go with the Eagles on that one.
Ryan Detrick: Well, you're right because just this week I saw the Eagles' Greatest Hits is the all-time leading selling album, just overtaking Michael Jackson Thriller, so there you go. Both of them our winners, but you're jumping on the bandwagon with the true one there with the Eagles, most sales ever.
John Lynch: Well, a little nickel knowledge, in 1984, I went to the Thriller concert in Philadelphia.
Ryan Detrick: I figured you could do the Moonwalk.
John Lynch: That's right.
Ryan Detrick: I know, yeah.
John Lynch: I pulled a hammy.
Ryan Detrick: Yeah.
John Lynch: With that mental note for everyone, that mental visual, we will close out today's podcast. For further information, please follow us on social, on Twitter, @LPL or @LPLResearch. Thank you and have a great week.