This bull market cannot end because the U.S. economy is still growing


With Trump’s pro-growth policies facing significant opposition in Congress, the financial media has suddenly awakened to the rude fact that MAYBE an infrastructure bill and tax cut will not be passed into law. They argue that if Trump fails the pass his promised policies, the S&P will crash at least 20%. “Even a bear market is possible”. We take the opposite stance on this issue. A bear market is impossible because bull/bear markets have nothing to do with federal policy. Trump does not determine whether or not the S&P 500 enters into a bear market. A bull market continues as long as the U.S. economy grows nicely, which it is doing right now. History has proven this point.
Historically, the US economy ALWAYS deteriorated significantly before it entered into recessions. THis was true in 1969, 1973, 2000, and 2007. Manufacturing, housing, employment growth, retail sales, etc would always start to go down before the economy goes down. GDP is a lagging indicator.
As of late-March 2017, there is no economic deterioration in sight! If anything, economic growth is accelerating. Inflation is not bad for the economy until it gets out of control. With CPI rising at 2% per year, inflation is far from being out of control. Employment is growing at 100k-200k new jobs per month, retail sales is rising, the U.S. real estate market is rising as a whole, manufacturing is increasing…. the list goes on and on. To use the words of Bill McBride from Calculated Risk, “the future is so bright that I need shades”.
Here are some examples.
The unemployment rate is coming down

Real retail sales (adjusted for inflation) is growing nicely, despite the bad news from physical retailers such as Sears (Amazon is eating their lunch).

Housing starts are rising slowly but steadily.

Initial jobless claims aresitting near all time lows and still falling.

I know that some pessimistic investors point to disappointing auto sales. However, it’s important to note that auto sales are terrible for timing bear markets. For example, U.S. auto sales peaked in 2003, an entire 4 years before the U.S. stock market peaked in 2007 and 5 years before the U.S. economy entered into a recession in 2008!
We do not “guess” how strong or weak the economy is. Rather, we combined 40 different economic indicators and created one super MacroModel indicator. On a scale of 0 to -40, this indicator tells us exactly how strong the economy is right now. 0 means that the economy is growing in perfect condition, while -40 means that the economy is going straight to hell. (Funny enough, the indicator has never hit -40 before. It shows that even in the worse of times, someone is doing ok. On the other hand, it’s not rare to see a reading of 0.)
The indicator is currently sitting at -8, which is very normal for solid periods of economic expansion. The indicator always falls significantly before a recession begins (i.e. falls below -20 or even -25). This means that the U.S. economy is growing nicely right now and that there are no problems in sight. Even if the economy were to deteriorate right now, it would be many months (i.e. more than half a year) before the U.S. economy could possibly enter into a recession. This means that there can be no bear market for equities in 2017.

6 comments add yours

  1. Great analysis. I didn’t realize that the indicator showed -8. All of those people that have been calling for a bear market are going to be disappointed.

    • Thanks for stopping by. This is just my opinion and research, so take it with a grain of salt.

  2. Thanks for sharing – I agree with you – at work I look at the economic indicators you look at here and it’s crazy. How can the market keep going up people say? Well, we are finally experiencing the growth that we should have experienced 5 years ago!
    Have a good weekend – I’m subscribing because I love this kind of stuff!

    • A lot of people say “this is one of the longest bull markets in history”. The thing is, bull markets don’t die of old age! They die because the fundamentals deteriorate to a point that’s beyond repair.

  3. Maybe ‘yes’ and maybe ‘no,’ but one thing’s for sure, and that’s ‘maybe.’ You make a good case for the market to continue marching higher and personally I try not to ficus too much on the market in general. As as dividend focused investor I just want to deploy cash every single month no matter what happens in the market or general economy. Everyday many reports come out for and against the bull market to continue or not. As a long term inbestor it’s best to tune out the noise and buy where value and yield look decent or good. Thanks for sharing.

    • And thanks for stopping by! Dividend investing definitely works well in a bull market even if you don’t use any leverage. Just keep in mind that lot of companies slash their dividends during recessions, so those dividends aren’t a guaranteed thing! 🙂

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