Many investors are wondering whether one of the longest bull runs in history is coming to an end.
In the two years since Donald Trump was elected president of the US, equity markets have reached almost unprecedented highs.
Strong corporate earnings and a growing economy has seen US equity valuations rocket. However, volatility is now returning, in part thanks to rising interest rates, the Federal Reserve reducing the size of its balance sheet, as well as trade tensions with China.
On 26 October, the S&P 500 closed down 9.3% from its peak of 2,931 on 20 September 2018, while the Dow Jones Industrial Average closed down 8% from its peak of 26,828, reached on 3 October 2018.
As both these major stock indices are now close to what is often called “correction” territory, many people are wondering whether one of the longest bull runs in history is coming to an end.
Bear markets most commonly occur with economic recessions and, at present, there have been few signs that a recession is imminent.
A primary contributor to recent stock weakness has been an offshoot of strong economic growth: rising interest rates. The Fed has been raising rates since late 2015 as the US economy has grown and the Fed is widely expected to do so again in December.
While some people may be concerned that rates will rise too high and too fast, tipping the economy into recession, the Fed is on a rate-tightening path because the economy is growing fast. Recent figures showed that US growth is up 3.5%.
The issue is, how correlated, if at all, market performance is with the person in the Oval Office.
Despite recent pullbacks, as of the end of October, the performance of the stock market under the current US president has beaten all but one first-term president since 1932, and is up 27.3% compared with the average market return in the first half of previous presidents’ first term of 5.5%.
The top spot is held by President Dwight Eisenhower, with a return of 28.9%.
A Midas touch
Admittedly, there were other two-year periods that saw stronger market performances, namely under Obama, Clinton and Reagan, but all three men were in their second term of office. On paper, it seems that the current US president has the Midas touch.
Although it is tempting to attribute market activity to policy, the reality is that politics is far more likely to follow economics than the other way around.
For example, the recent cuts to corporation tax, while welcomed by companies and employees alike, may represent a one-off shot in the arm, rather than the start of a longer-term upward trend.
In a recent survey, The National Association for Business Economics found that the tax cuts that the current administration signed into law almost a year ago have had little or no effect on most US companies’ hiring and investment plans, whereas the decrease in unemployment and prolonged wage growth started before the current US president was sworn into office.
In short, the current economic climate is often more dependent on larger, long-term factors than short-term political intervention.
So, when will the bull market come to a close? It’s extremely difficult to pinpoint the exact moment that a market will turn.
Since 1966, the average bear market has lasted just under 17 months, a far shorter time frame than the average bull market, and they often end as abruptly as they began, with a quick rebound that is very difficult to predict.
Long-term investors are usually better off staying the course and not pulling money out of the market. There are some warning signs that the bull run may be in its final stages, but even if we do enter a traditional bear market, it will likely be unrelated to the current administration, unless political risk escalates.
Until then, fundamentals are likely to continue to drive sentiment and keep returns buoyant into 2019.
Kully Samra is vice-president of Charles Schwab.
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