Much has been written in the secular and financial press lately about the bull market in stocks being over. But is it really? I have several observations that I think will help you understand better why we believe it’s nowhere near over.
First, equity market movements do not have defined lives – like a human being’s life expectancy. Rather than a defined time limit, market movements are driven by underlying economic factors primarily related to economic growth. Unquestionably, by any metric, our economic growth has now returned to a “normal” 3-3.5% range after sixteen years of national economic stagnation between 2001-2017. The equity market’s positive performance merely confirms this underlying economic growth. Equity prices are a reflection of the growth in earnings and revenues of the companies that make up our market. For that reason, and because we are barely beginning to change the destructive national government policies that held our growth below a percent and a half for nearly two decades, the party is definitely not over! It has, in our opinion, many years of growth ahead!
A second factor to consider is the time length of past bull markets and compare them to the current market’s run. Our current bull market began in March of 2009 and has run 124 months and risen 341%. In comparison, the bull market of the 1950’s, and stretching into the early ’60s, ran 181 months and created a 929% total return for investors. The bull market of the ‘70s and the ‘80s ran 155 months and created an 845% investor return. The bull market of the late ‘80s through the 1990’s ran 153 months and created a 833% investor return. As you can see, even on average, we are likely to see years of growth ahead if we merely compare past durations of bull markets. We also should have, on an average comparison basis, over 500% of additional returns until next the expected market peak!
A third reason the party is far from over pertains to government policy. For many decades, our nation’s “leaders” created horrible economic environments and spent at a level that bankrupted our grandchildren’s future to pay for our current expenses. For example, they tied the hands of our nation’s banking system by passing legislation for the Community Reinvestment Act (CRA) and then castigated banks for the entirely legal activities they pursued under that legislation, which ultimately led to the melt down of 2008-early 2009. Republicans and Democrats, in both the House and Senate, and several Presidents promulgated policies and pursued political paybacks to their supporters that have truly negated and reduced our country’s growth economically and in job creation. Through irrational trade policies our nation’s “leaders” literally exported tens of millions of American jobs to other countries – largely to pacify the international community.
Those types of nonsensical policies, and nonsensical laws passed by our nation’s Congress, led to much of the problems that were still prevalent in our economy at the beginning of 2018. But 2018 also marked the beginning of a return to rational taxation policies, rational international trade policies, rational mutual defense pacts, rational incarceration policies, rational immigration policies, and we could go on and on! President Trump’s policies have, in large part, led us out of the economic stagnation our country experienced for many years.
Fourth, the decades from 1986-2017 marked the longest period of decline in interest rates in our country’s history. This decline in interest rates led to historically, and abnormally, high returns for bonds. Now, the interest rate path has reversed! Since 2017, we have been on a very gradually increasing interest rate path. As our economy grows stronger, and the need for money becomes greater to finance that growth, we believe that there will ultimately be an increase in interest rates of huge magnitude. Why is this important? It’s important because when interest rates go up, the value of bonds you own declines. Rates normally move higher over a very long-term period – likely twenty to thirty years. During that time, bond holders will see asset values decline in bonds they currently own, they will begin to sell their bond positions in response. We believe the proceeds of these sales are most likely to go into equities. Sales from the bond market will further exasperate the interest rate rise and cause a stampede out of bonds, which we believe, as I have previously written, is why bonds are the greatest investment bubble of all time! This is why our current investment models do not generally contain bond elements.
Most of the equities held in your portfolios we estimate to be currently undervalued at approximately 30-40%. This accounts for, in part, why our portfolios have averaged a return, from January 1, 2019 through today’s close, of 24.55%. That includes all of our managed accounts and is also net of all client costs. These returns significantly exceed the S&P 500 Index return of 18.44%. I want to say this clearly; the party is not over! It won’t end for years because the policies that have shaped our economy’s positive growth have only recently changed.
But What About the 2020 Election?
Now onto another topic. Will the policies we’ve mentioned change if President Trump does not get a second term? The answer, in my opinion, is unequivocally yes! If this occurred, that could significantly reduce our nation’s growth and your investment returns. So now allow me to prognosticate. Our long-term clients know that on September 16, 2016 we stated, in a newsletter to our clients on that date, that President Trump would be elected in the 2016 election. We stated this unequivocally, and it was based on our own analysis of the likely electoral college count which is, after all, the way our constitution dictates we elect our President. Now, due to a multitude of factors, there is no doubt in my mind that Trump’s reelection is virtually assured. His reelection will then further cement his economic, regulatory, trade, and immigration policies. That is likely to have a huge, and long-term, impact on our nation’s economic growth, our fellow citizens’ jobs, and the growth of your income and wealth.
We hope that this information is of benefit to you. We hope it explains, a little bit better, why we feel absolutely certain about the positive path of growth in your accounts, of our nation’s economy, and of continued job and real income gains for our nation’s middle class. We are 100% committed to making your financial situation more stable, building your wealth, and safeguarding your assets long-term. God bless you and your families and thank you for the many wonderful relationships you’ve given me and our firm’s associates over these years.