Cracks start to show up in bull’s armor

The Wall Street bull market may be the longest in history, but there are signs of weakness starting to appear.

After 3,454 days without a drop of 20 percent or more, there’s bound to be cracks in the foundation of the graying bull. And Oliver Jones, a markets economist at Capital Economics, a Londonbased firm, raised a yellow flag in a report Thursday.

Jones’ beef is that so-called cyclical stocks, or those that have benefited most from the health of the U.S. economy and have led the market advance since the financial crisis, have started to post smaller returns than so-called defensive stocks. Tech stocks and shares of firms that sell discretionary goods have been losing ground since early June to more defensive parts of the market, such as utilities, health care and companies that sell consumer staples.

“Defensive sectors have picked up the baton, and we think this could be a sign of trouble ahead,” Jones wrote.

One theory as to why less highoctane stocks have started to do better is that they may be less vulnerable to concerns about trade, Jones noted. What worries him, though, is that the economically sensitive stocks also did worse than more defensive stocks in the run-up to the internet stock crash in 2000 and the financial crisis in 2008.

Jones expects U.S. economic growth to “slow sharply” next year because of the headwind from Federal Reserve interest rate hikes and the fading benefits from tax cuts. “We forecast that the S&P 500 will fall about 20% between now and the end of the year,” Jones wrote.

That’s a bear market.