Outlook 2018

The very long term

As we have pointed out in previous Quarterly Market Outlooks, the unprecedented liquidity injection by the developed world’s major central banks has made short term market forecasting very difficult. We, therefore, thought it would be helpful to update our views as to where North American markets in general and the U.S. market in particular might be situated in a longer term perspective.

As regular readers of our Strategy Notes will know, we have always been interested in market cycles. We divide these into cyclical and secular cycles. On average, secular uptrends comprise several four to 4.5 year cycles and can last anywhere from 10 to 30 years. Over the last 120 years, there have been four secular bull markets. The first took 13 years from 1896 to 1909 and saw the Dow Jones Industrial Index gain over 200%. The second was in the 1920’s (1920 to 1929) and resulted in a 300% gain. The third lasted 30 years (1942-1972) and resulted in a gain of almost 800%. The fourth secular bull market was the biggest of the four and saw the DJII gain almost 1400% (from 1982 to 2000).

Secular downtrends tend to be shorter than secular uptrends – roughly 12 years on average versus 18.5 years for the average secular bull market – although the current secular bear market has lasted 17 years. In contrast, compared to the normal four to 4.5 year cycle, the current cyclical bull market has lasted almost nine years from its inception in March 2009, making it the second longest in history. Cyclical bull markets do not die of old age. They normally end as a result of a recession (9 out of the last 10 times in terms of the US market). The extended cyclical bull market owes much of its unusual length to the extraordinary monetary measures taken since 2009 by the Federal Reserve Board.

The good news as we expand on in the section below in regards to the shorter term market outlook is that we do not currently see an imminent risk of a recession ending the bull market over the next 12 months unless there is a major unexpected exogenous shock to the U.S. economy. In fact, in Q4 we completed our regular semi-annual interviews with the major Canadian banks (as well as the rest of the companies in our equity universe). One of the questions, we have asked the bank CFO’s we have interviewed is when is the earliest they currently see (from interactions with their clients and talking to their Economics departments) as  a possibility for a North American recession – again barring an exogenous event. The personal view of one of the CFO’s who also was previously in charge of Risk for the bank was “not until at least 2019”. Although this cycle is “long in the tooth”, the moderate recovery in U.S. GDP would likely result in a drawn out cycle. In sum, it is still our view that we will see one more cyclical bear market before the current secular bear terminates.

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