The current Wall Street bull market has become nothing short of the third longest in history by accumulated profitability. From the lows set on March 9, 2009, the S & P 500 has revalued more than 270%, from the 666 to the 2,500 points in which it moves now.
This spectacular rise has allowed the main stock index in the world to surpass the 266% revaluation achieved in the bull market that took place between 1949 and 1956. An impressive record that very few could anticipate in that month of March, but that finally has materialized.
However, these impressive data also provide reasons for concern. The largest bull market in history took place over 10 years, between 1990 and 2000, with profits exceeding 400% for the S & P 500; and ended with the explosion of the technological bubble and the crisis of the dot.com.
Wall Street's second-largest bull market generated returns in excess of 300 percent, but ran from 1932 to 1937, just after the Great Depression and before World War II. The questions are obvious: how will this bull market end and when will a new bear market begin? No one knows for sure, but after eight-and-a-half years of uninterrupted earnings for US equities history says it expects sooner rather than later.
Market consensus often coincides with bearish markets occurring as investors begin to anticipate an economic recession, something that is not yet visible on the horizon. Job creation in the United States remains solid and economic growth is moderate but continued. And for the moment, inflation remains under control, although its evolution remains a mystery even for Fed Chairman Janet Yellen.
The biggest risk, perhaps, is that the Federal Reserve itself has embarked on the process of monetary tightening. Interest is at 1% -1.25%, but the Fed has already anticipated that it will rise again in December and foresee another three increases in 2018. In addition, it has announced that it will begin to reduce its balance sheet in October. The great age of liquidity and free money comes to an end. And this is where problems often begin, even though they have not yet come to light.
HIGH RISK
In a report released this week, experts at Goldman Sachs, one of America's most influential investment banks, wonder if it is possible to predict or anticipate bear markets. "The current bull market is one of the most durable and strongest in history and investors are increasingly focused on whether a bear market is imminent and whether it really is predictable," they say.
"Overall," says Goldman, "the bear market risk indicator is at 67%, suggesting that the risk of it occurring is high"
These experts identify five factors that, in combination, provide reasonable guidance for measuring the risk of a bear market: valuation, inflation, unemployment, evolution of service sector and manufacturing activity indicators ISM and bond yield curve of the Treasury.
"Overall," says Goldman, "the bear market risk indicator is at 67%, suggesting that the risk of it occurring is high." In his view, the market "is expensive and profit margins at record levels." In addition, they point out that the Fed's monetary policy will continue to tighten.
However, they add that these risks are mitigated in part by the smaller structural inflation, accommodative guidance on interest provided by the Federal Reserve and a lack of financial imbalances in the banking sector.
WAITING FOR INFLATION
Since the analysis firm Pantheon Macroeconomics provide an interesting insight. In his view, the impact of hurricanes on the economy will be transitory and the unemployment rate will continue to decline to 4% early next year.
His fear is that US financial conditions will harden aggressively in a short period of time if investors believe that inflation will not be a problem
This will trigger additional inflationary pressures on wages, which will keep the monthly growth of the underlying inflation rate at 0.2%, which will force the Federal Reserve to continue raising interest rates. "No one at the Fed wants to see unemployment below 4%, because the United States has not been able to sustain these rates in the past without significant inflationary pressure," they say.
In his view, there is a high risk that the market will not lend credibility to the Fed's forecasts of raising interest rates six or seven times by the end of 2019. "If the gap between market expectations and the Fed's expectations increases, there will be a clear correction in the stock markets and a rebound in the dollar, "they say.
His fear is that "financial conditions in the US will tighten aggressively in a short period of time if investors continue to believe that inflation will not be a problem in the future." "We can not say that this will be the case, but we are sure that the risk is greater than the market is discounting right now," they warn.
MINOR EXPECTED RETURNS
Robeco Investment Director Lukas Daalder says they have lowered their outlook for most assets and are anticipating volatility in the future. "This sounds worse than it really is: the weighted returns from a well-diversified portfolio will only be slightly reduced," he says.
The current bull market will die when the market begins to anticipate a recession in the US, if there is a war or if a bubble
In his view, financial markets are entering a "maturity phase within their cycle", propitiated by the withdrawal of stimulus from central banks. According to their forecasts, "this will lead to a decrease in the profitability of risky assets, in part due to the arrival of an inevitable recession." According to the National Bureau of Economic Research, which measures US economic cycles, the country has been in economic expansion since June 2009, the third longest cycle since the mid-nineteenth century.
Goldman Sachs explains that there are three types of bear markets. Cyclics are the most common and occur precisely because of economic recessions. They usually register falls of 30% and last about 26 months on average. In addition, it takes them about four years to recover their previous maximum.
Other types of bear markets are those caused by external shocks such as wars. They are shorter and less severe and usually fall by 26% for seven months. In addition, it takes about 11 months to recover their previous maximum. Finally, structural bear markets, caused by asset bubbles or financial imbalances, are the most severe. They can cause 50% falls, last between three and four years and take a decade to regain their previous maximum.
In conclusion, the current bull market will die as the market begins to anticipate a recession in the United States. It may also end if there is an external shock as a war conflict (the fear of many investors is the growing tension with North Korea) or if a bubble explodes in the price of some asset, as in 2007 with subprime mortgages, . Meanwhile, Wall Street continues marking historical maximum after historical maximum. As a curiosity, the Dow Jones has set records 42 times in 2017. In 1995, it did so in 69 occasions. Will he be able to overcome that record as well?
