Is the bull mar­ket over?

The Pak Banker - - OPINION - Barry Ritholtz

Is the bull mar­ket, which started af­ter the lows of early 2009, com­ing to an end? Let's have a look at some data, as well as the ar­gu­ments pro and con, to see if we can find any in­sight. In par­tic­u­lar, I want to look at the latest eco­nomic, cor­po­rate and mar­ket is­sues to see what we might learn. First, the U.S. econ­omy. As we have ob­served, it has been a long slog out of the depths of the fi­nan­cial cri­sis. Gross do­mes­tic prod­uct growth has never re­ally taken off; wage growth is weak; and re­tail sales, ex­cept where cheap credit flows freely, have dis­ap­pointed. Many peo­ple have lit­tle or neg­a­tive eq­uity in their homes. I have ex­plained -- or if you pre­fer, ra­tio­nal­ized -- that this is typ­i­cal of other post-credit-cri­sis re­cov­er­ies.

The pri­mary up­side to the U.S. econ­omy has been job cre­ation, hous­ing and de­mand for cap­i­tal. Start with the re­cov­ery in the la­bor mar­ket. Un­em­ploy­ment now is 5.3 per­cent, al­most half of what it was in the af­ter­math of the cri­sis; 11 mil­lion jobs have been cre­ated since the Great Re­ces­sion ended. Job open­ings con­tinue to in­crease, and there are signs that wages may fi­nally be­gin to move higher. This is sig­nif­i­cantly bet­ter than it has been at any time since 2007.

Sec­ond, hous­ing has im­proved. It is still be­low where it should be un­der nor­mal cir­cum­stances, but as we have noted, these are not nor­mal cir­cum­stances. Aided by low in­ven­tory (cour­tesy of the afore­men­tioned eq­uity is­sues) and cheap mort­gage rates (cour­tesy of the Fed­eral Re­serve), prices are re­bound­ing. We are also see­ing build­ing per­mits rise, and bid­ding wars for both buy­ers and renters are not un­com­mon. In se­lect coastal and ur­ban ar­eas, there are def­i­nite sup­ply short­ages. De­spite this lumpy and un­evenly dis­trib­uted im­prove­ment, the hous­ing re­cov­ery is oc­cur­ring. Last, and per­haps most mean­ing­ful for where we are in the cur­rent cy­cle, is de­mand for cap­i­tal. With rates as low as they are, de­mand for pri­vate eq­uity, ven­ture cap­i­tal and cor­po­rate bor­row­ing has been ro­bust. It has reached the point where the Fed is thought to be on the verge of rais­ing rates.

One caveat: U.S. cor­po­ra­tions do have a prob­lem de­cid­ing what they should do with all their ex­cess cash. Although the de­fault set­ting has been share buy­backs or div­i­dend in­creases, it would be bet­ter if they in­creased re­search and de­vel­op­ment and cap­i­tal ex­pen­di­tures. That would help drive the next phase of any vir­tu­ous eco­nomic cy­cle. In gen­eral, prof­its con­tinue to hang in there. But com­modi­ties have been pun­ished, with the energy sec­tor get­ting hit hard­est; oil is down al­most 60 per­cent from last year's highs. Lower energy costs typ­i­cally re­sult in higher con­sumer (and to a lesser de­gree, cor­po­rate) spend­ing. That has yet to re­ally show up in the data.

A sim­i­lar risk to cor­po­rate profit mar­gins is the com­pe­ti­tion for work­ers. It isn't a co­in­ci­dence that as un­em­ploy­ment has fallen, low wage shops such as Wal-Mart and McDon­ald's have said they will raise wages. At some point in the fu­ture, this should work to the ben­e­fit of re­tail sales, which in turn, lets these re­tail­ers hire more work­ers and pay them bet­ter. Don't get too ex­cited, as we have not yet seen much ev­i­dence of this par­tic­u­lar vir­tu­ous cy­cle.

There are many neg­a­tives, or course -- there al­ways are. But I see two that in par­tic­u­lar are note­wor­thy. And per­haps sur­pris­ingly, the pos­si­bil­ity of a Fed rate in­crease some­time in 2015 isn't one of them. The first huge risk has to be China, which last week joined the cur­rency wars in a sign of des­per­a­tion as its econ­omy tanks. Its stock mar­ket bub­ble has popped and it's deal­ing with a huge debt over­hang. China both re­flects and drives a sig­nif­i­cant per­cent­age of global eco­nomic ac­tiv­ity. It looms large when we con­sider what it means when in­dus­trial met­als such as cop­per and iron ore have huge price declines. Coun­tries and com­pa­nies that pros­pered by feed­ing China's fac­to­ries face the big­gest po­ten­tial hits. The sec­ond neg­a­tive has to be the tech­ni­cal de­te­ri­o­ra­tion of the mar­kets. I don't trade day to day, so I am not all that con­cerned about ev­ery 5 per­cent or 10 per­cent pull­back. Still, in­vestors who are long never ben­e­fit when bull mar­kets nar­row­ing as this one has. Al­most 30 per­cent of the Stan­dard & Poor's 500 In­dex com­po­nents are down 20 per­cent or more from 52-week highs. So is the bull mar­ket over? I find it hard to reach that con­clu­sion. At the very least, we have been long over­due for a sim­ple 10 per­cent cor­rec­tion. And while the eco­nomic data has been on the mixed side, we don't see the usual in­di­ca­tors of re­ces­sion, at least in the U.S. For in­di­vid­ual stocks, you can cer­tainly tighten up those stop losses. But un­til we see more neg­a­tive eco­nomic and cor­po­rate data, the op­tion of giv­ing the mar­ket the ben­e­fit of the doubt re­mains the most ap­peal­ing choice for as­set al­lo­ca­tion port­fo­lios.

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