Download Can an old bull learn new tricks? (March 2017)

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S&P 500 bull market turns eight years old on
March 9, 2017, the current expansionary phase of the
US business cycle is only a few months behind, and
Canadian and US equity indices continue to reach
record highs – all this leaving some to wonder if equity
investors are living on borrowed time. We don’t see
either economic growth or bull markets ending for the
sake of these arbitrary expiration dates. Rather, our
look at the facts lead us to see more opportunity
ahead.
and the like. The outcome of all this progress over time
has been longer periods of economic growth (see
Exhibit 1 and 2). The average expansionary phase of
the business cycle in the modern era (post WWII) is 60
months. The last three economic expansions dating
back to 1982 have been some of the longest in history,
including the longest, lasting 120 months (March 1991
to March 2001). The current expansionary phase is 92
months old – a full two years away from hitting any
longevity records.
The expansionary phase of the current business cycle
began in July of 2009 and has now entered its 93rd
month. Looking back over time, the average US
economic expansion period has lasted roughly 40
months, leaving some to claim that this growth phase
is getting long-in-the-tooth. The catch is that you would
have to look back all the way to 1854 to bring the
average down to 40 months, and a lot has changed in
over 160 years!
Consider the strides forward that the world has made
through globalization, modern monetary and fiscal
policy, labour and capital mobility, social safety nets
Source: NBER February 2017
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longer to achieve what previous cycles have in terms
of economic growth.
At the current pace of economic growth and inflation,
we believe that the current US economic expansion
could very well become the longest in history. In order
to do that it would need to extend another nine
quarters to surpass the previous ten year record.
If you consider that this bull market began post the
Great Financial Crisis and just prior to the end of an 18
month recession, one could argue that the bull market
is also younger than the calendar would suggest.
Furthermore, bull and bear markets are defined by an
arbitrary 20% rise or fall. With that in mind, the current
S&P 500 bull market would only be six years old if the
2011 decline of 19.4% hadn’t fallen just shy of the
arbitrary 20% threshold.
Source: NBER, February 2017
In any market environment we experience frequent
equity market pull-backs of less than 20%. These are
healthy periods of consolidation as fundamentals
catch-up to forward looking prices, or as equity prices
re-calibrate to new fundamentals. The current eight
year US bull market has already seen four declines
greater than 10%.
In our view the current economic expansion is looking
a lot ‘younger’ than its near-eight year anniversary
(July 2017) might suggest. Consider that this economic
expansionary phase began after the longest and
deepest recession in the modern era (December 2007
to June 2009). Economies had much to heal from, and
only recently have economists moved beyond words
like ‘recovery’.
Combine that perspective with the fact that this
expansion has been marked by one of the shallowest
paths of recovery for US GDP growth, employment,
wages, productivity, interest rates and inflation.
Although the cycle is in its eighth year, cumulative real
GDP growth has been just 17.1%. Compare that to an
average of 44.3% over the three previous post-WWII
cycles that were of greater length (1961-1969, 19831990 and 1991-2001)1. All of this suggests the
expansionary phase of this cycle is simply taking
Bull markets most often die near the onset of economic
recessions, and we don’t see a recession on the near
horizon. The end of an expansionary phase is typically
marked by sustained wage inflation, above average
core inflation, aggressive monetary policy tightening,
and peak levels of business capital expenditures,
housing activity, capacity utilization and employment.
While in recent months many of these measures are
moving up; from our lens, most, if not all, are not yet
over-extended.
1. Source: Deutsche Bank
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Eventually there will be another recession; they are a
natural part of capitalism and are necessary to sweep
away excesses, inefficiencies and complacency. They
return discipline to the allocation of capital and
resources. In our opinion, we do not see the signs or
conditions that would trigger a recession in the near
term.
closer to extreme lows than extreme highs (Exhibit 4 &
5). We see this as further support that with a longerterm perspective, equity markets are still reverting
higher to their average 10-year rolling compound
annual return, with room to run before a period of overexuberance.
On the doorstep of the eight anniversary of the March
9, 2009 low of 676 for the S&P 500 and 7566 for the
S&P/TSX Composite, no doubt reports will abound
quoting the cumulative rise north of 200% and 100%
respectively for equities since the post financial crisis
bottom. This may lead investors to believe that all of
the ‘juice’ has been squeezed from equities for this
cycle. We must be careful not to be unduly influenced
by a single data point or an eye-popping headline.
When we observe where equities sit today on an
annualized basis from the 2009 low, the numbers are
much less extreme at 17.0% for the S&P 500, 9.7% for
the S&P/TSX Composite, and 8.5% for the MSCI
EAFE index (Exhibit 3). Additionally, both US and
Canadian equities sit well below their average 10-year
rolling compound annual returns, currently much
Source: Bloomberg │ Local currency │ Price only returns │ MSCI
EAFE quoted in US dollars
Source on exhibit 4 and 5: Bloomberg │ 31 Jan 2017
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Market index price levels represent the combined
value of the future profit generating ability of the
intellectual property, human and physical assets of
the corporations that comprise them. Thankfully,
equity markets have been making new all-time highs
for centuries.
declines for equities have followed (sometimes
closely) fresh all-time highs, what is forgotten is that
in most cases, those all-time highs were not the first
new all-time highs reached for that bull market.
Historically, equity markets have made many fresh
new all-time highs only to move higher for many
years before experiencing a bear market. In fact, the
S&P 500 is in one of these periods right now (See
Exhibit 6 and Exhibit 7). Since cresting above the
previous peak in 2007, the S&P 500 has made 138
new all-time highs (and counting).
Don’t be fooled into thinking that all-time highs are
closely associated with an apex for equities, and that
fresh all-time highs arrive just a few short months
from severe equity draw downs. While some sharp
All-time highs are simply numbers, they are not to be
feared, nor overly celebrated. Importantly, arbitrary
market milestones should not dictate your investment
decisions.
Source on exhibit 6 and 7: Bloomberg │ 28 Feb 2017
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
Expansionary phases of the business cycle and
equity bull markets do not come with pre-set
expiration dates.

Periods of economic growth have been
elongating through time, with the longest ones
having been among the most recent, and we
see scant evidence that the current cycle of
economic expansion is approaching its demise.

Equity markets have made great strides, and
there are good fundamental reasons why. Even
with the length of the current bull market, longerterm measures of equity market performance
remain well below historic norms.

We believe the best approach for today’s markets is
to stick to a disciplined long term investment plan that
is tailored to your needs and avoid being tempted into
making rash decisions based on the emotions
associated with arbitrary numbers and dates being
reported in the media. As professional portfolio
managers, we take the same advice – choosing good
companies to invest in based on weighing the
evidence on hand and not reacting to arbitrary time
markers. It’s a proven and disciplined approach to
long term investing that has withstood the test of
time.
♦
It is as important now as ever to ensure that you
have rebalanced your asset mix and that it
continues to suit your needs.
Copyright 2016 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management
Group Ltd.
The views expressed in this commentary are those of GLC Asset Management Group Ltd. (GLC) as at the date of publication and are subject to change
without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific
investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment
carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances.
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