Brian B. Sullivan, CFA, President and Chief Investment Officer, Regions Investment Management
December 1, 2014
A column to help investors gain perspective on today's market noise
Good Times, Bad Times
The next twelve months are going to be difficult for equity investors. Whether you think the market is currently too high and bound to fall, or if you think this market has plenty of room to run, the next year will try your nerves.
We have been riding this bull market since March of 2009. It is showing signs of being old and tired, but it’s not dead yet. Earnings growth is still good, and economic growth seems finally to have reached a pace fast enough to create momentum. Sales growth leads to employment, and employment leads to sales growth. Growth has at long last been strong enough to force employment of the marginal employee and business investment in plant and equipment.
Employment has grown by about 220,000 jobs per month this year. 220,000 jobs a month is enough to employ all of the new labor market entrants (~100,000), plus reduce the rolls of the unemployed and underemployed by 120,000 each month. This has pushed unemployment to cycle lows, and is reducing the long term unemployed as well as the numbers involuntarily in part time jobs.
After long anticipation, business investment spending on equipment and structures appears to be growing. Equipment spending over the last four quarters is up 8.8% compared to the prior four quarters of 4.8%. And spending on structures was 7.4% over the last four quarters, compared to 0.1% over the prior four quarters. Spending in this sector has been lacking for the entirety of the recovery; it is a welcome addition.
So the economy has momentum in several areas: labor, business investment, and (not previously mentioned) consumer confidence, and state/local government spending. All this is supportive of the stock market. But economic cycles and stock market cycles are not synchronized. The stock market cycle leads the economic cycle. Last year’s stock market strength predicted this year’s economic strength. So while we can’t yet see the end of this economic cycle, the end of the bull market is clearer.
Dazed and Confused
Investors seeing strength in the economy and the stock market over the next several months will take comfort in their strength and will have increasing confidence. Their confidence may push them deeper into stocks. Those who thought the market would fall may change their opinion and buy again, but this is a trap.
Bull markets generally end after a period of strong returns but with leadership in a few sectors that benefit from a late cycle economy; namely, information technology, industrials, and resource companies. Because the U. S. economy is strong while the rest of the world is not, we may not see the typical rise in commodity prices and a surge in materials stocks, but we have seen information technology and industrials leading. The end is nigh.
The Federal Reserve will raise rates next year and by midyear we will know it. Bond yields will react, rising in advance of the Fed move. Stock investors will react in advance also. After six years and three months the bull market will end. It is too fine a point to pick a day or a month, or even a quarter, for the end of the bull market, but it is helpful to hypothesize--and then to test the hypothesis. Suppose, then, that the bear market begins on July 1, 2015, The Fed begins raising rates on September 30th and the economy enters recession in June of 2016. Are you getting ready?
Source: US Bureau of Economic Analysis, RIM
©Regions Bank, Member FDIC. The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM). RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation. The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person. Investments discussed in this report are not FDIC-insured, not deposits of Regions Bank or its affiliates, not guaranteed by Regions Bank or its affiliates, not insured by any government agency, may go down in value, and not a condition of any banking activity. Investment advisory services are offered through RIM, a Registered Investment Adviser. RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.
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