The Longest Bull Market

I can’t help it. As an investor and newsletter editor, I closely follow what’s going on in the economy and the stock market.

It’s important to me to have a handle on why stocks are moving, what’s driving the economy, where there’s risk, and where there’s opportunity.

Of course, there’s a selfish reason for me: My investments make more money when I stay on top of things. But more than that, people who subscribe to my newsletters want an informed opinion about what’s ahead.

I don’t kid myself into thinking I am the single source of information for these folks — the one authoritative voice for all things investing. In fact, I hope I’m not. It’s always a good idea to get as much input on a topic as you can. Probably half my day is spent reading other people’s work, both bearish and bullish.

And besides that, if I fail to present solid analysis and thoughtful conclusions to my paying readers, they quit and move on. The fact that more than 14,000 people currently subscribe to The Wealth Advisory is all the validation I need…

I’m not going to pander to you and just say what I think you want to hear. I know I can get more people to read my writing here in Wealth Daily if I write articles entitled, “Gold is Going to $5,000” or “Stock Market Crash.”

If I think there’s opportunity in gold (and I do think gold mining stocks should be bought now, as these stocks are incredibly cheap), I’d say so. If I thought the stock market was about to correct/crash, you can bet I’d be telling you to sell some stocks.

So for those that want to hear an unbiased take on what’s ahead for the stock market, please read on.

(WARNING: This is bullish analysis. If you want to hear that stocks will crash, look elsewhere.)

3 More Years of Bull?!?

I want to share some analysis from Dr. Ed Yardeni today.

Dr. Ed was the Chief Investment Strategist for Deutsche Bank in the ’90s. He was also Chief Economist at Prudential and E.F. Hutton for a time. Today, he runs his own research firm, and if you’re interested, he writes a daily blog called Dr. Ed’s Blog.

On Monday, his blog post was titled, “The Long Expansion.” In it, he suggests this bull market could last until early 2019, or three and a half more years.

I’m not aware of anyone who has suggested the bull market will last that long. So it’s worthwhile to know what he’s looking at.

It’s called the Coincident Economic Indicators (CEI), and it’s made up of payroll employment, real personal income less transfer payments, industrial production, and real manufacturing and trade sales. While stocks have been hitting new highs for a couple years now, the CEI (blue line below) entered new high territory about a year ago:

Dr. Ed tells us that after the last five recessions, it took the CEI between 19 and 33 months to make a new high. The average time is 26 months.

This time around, after the financial crisis, it took 68 months for the CEI to make a new high.

Now, the fact that it took so much longer than average for the CEI to get back to previous levels shouldn’t be that big of a surprise. The financial crisis was pretty much unprecedented since the Great Depression.

Add in the fact that federal government debt has meant it isn’t spending as much as it has in past recoveries, and you have the formula for a long, drawn-out recovery, with GDP growth rates seemingly stuck between 2% and 2.5%.

Bloomberg illustrates the point with this graphic:

My point is not that the government should be spending more. We’re already in a pretty big hole. No, the point, according to Dr. Ed, is how long the CEI trends higher after it has a new high. And he thankfully provided us with another chart to demonstrate…

The interval for the CEI between a new high and a new recession has been between 33 months (1971 to 1973) and 104 months (1992 to 2000). The average length of expansion in the CEI is 48 months.

Add it all up, and you get March 2019 for when the current cycle for the CEI ends. That would make this the longest bull market in history by far.

Damn Statistics

Of course, what Dr. Ed is showing us is a bunch of numbers that don’t really have much bearing on where the economy is actually headed. Yes, they do show us what the trends are, but just because a lot of people bought cars last month, for instance, doesn’t mean they will buy more cars next month.

That’s why the Wall Street saying is, “Trend following works, until it doesn’t.”

What kills bull markets? Recessions do. And recessions happen when the economy overheats and people and companies have spent too much and are suddenly forced to cut back. Economic activity stalls, and that’s when corporate profits decline.

It may seem over-simplistic, but with the U.S. economy growing at 2% to 2.5%, the economy is certainly not overheating. Does that mean four more years of bull market? We’ll see…

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.