There's been a lot of chatter recently. The "fat, ugly, bubble." Is the "bull running out of steam?" Goldman strategists "are becoming more cautious about stock markets."
At Runnymede, we are neither perma-bulls nor perma-bears. Rather our perspectives on the financial markets are based upon research, and our market outlook is reflected in the positioning of our clients' portfolios. In fact, we have been bullish on the market since July 2016. So where do we stand right now with the bull market having recently celebrated its eighth birthday? After much thought and careful reflection, here are five reasons why the bull market is likely to go higher.
- Corporate profits rebounded recently alongside solid growth in the broader U.S. economy. This key measure of after-tax earnings across U.S. corporations rose 5.2% in the third quarter from a year earlier. That was the first annual increase since late 2014 and the strongest year-over-year growth since the fourth quarter of 2012. Stronger growth in corporate profits is the most important driver for stock prices.
- Bearish U.S. Investor Sentiment. Investor Sentiment is surprisingly bearish to cautious. % Bearish is at 46.5% compared to 35.6% last week and 29.3% last year. This is higher than the long-term average of 30.3% and is at similar levels to the pessimism seen during early 2016. This means that investors are not too euphoric yet. As a contrary indicator, the outlook for the U.S. equity market is positive given such a negative sentiment.
- U.S.-China Economic Health. The U.S. and China economies are the economic locomotives for the world. China's economy remains healthy and strong. Their Central Bank said that it will maintain ample liquidity and achieve reasonable growth in money supply and credit, while taking steps to control asset bubbles and financial risk. Furthermore, President Donald Trump is planning to host Chinese President Xi Jinping for a summit in April at his Mar-a-Lago estate in Florida. Secretary of State Rex Tillerson is expected to finalize plans for the summit with Chinese officials as he arrives in Beijing at the end of March. While a potential U.S.-China trade war poses perhaps the largest risks to the health of the global economy, recent communication between the two countries appears to be constructive.
- Russia. In past years, relations between Moscow and Washington went from bad to worse -- Russia's annexation of Crimea, military activity in Eastern Ukraine, Russia's backing of Syrian President Basher al-Assad, the reported interference with the U.S. election. The current administration is taking the approach of normalizing relations with both China and Russia.
- Money is flowing out of Japan and Europe into the US. Money is coming from Japan and Europe to the U.S. The continued stimulus from these regions are too significant to ignore. The European Central Bank is printing $84 billion per month and the Bank of Japan is printing $59 billion per month. Despite four years of economic stimulus, Japan (the world's third largest economy) remains roughly flat since Prime Minister Shinzo Abe came to power promising massive structural reforms. Japan's market has been flat and unattractive. Looking across the Atlantic, European economies continue to struggle over the last nine years. Brexit, slow economic growth, and high unemployment have made European equities unattractive. Fund flows are positive for U.S. financial markets.
As the Chinese proverb goes, "May you live in interesting times." No doubt that we are late in the current expansion. We believe the five reasons stated herein potentially takes the stock market higher, even in the face of greater political headline risk. For now, we do not see storm clouds on the financial horizon.
How are you feeling about stocks? Are you buying, selling, or staying neutral?