Investors are counting the birthdays of this bull market. The consensus is that our nine-year-old bull is long in the tooth. Indeed, at 108 months, this is the second longest bull market in the past 75 years. The longest, at 113 months, ran from late 1990 to early 2000. The current bull has delivered a return of 311.9%, second again only to the 1990’s bull, which returned 417%.
But is the current bull market at imminent risk of keeling over? If you ask me, we’ve probably got a few more trots around the ring.
When the aging bull does finally succumb, its end will no doubt come at the hand of inflation, more specifically, wage inflation, which was also the culprit in the recent market correction.
If there is an economic black widow, it’s wage inflation. Wall Street gets nervous about this financial data point. But the wage inflation numbers for February were benign and pose no lethal threat to our bull.
As we forge on, however, there are a few other dangers to watch.
1. Excessively Expensive Markets – We see this phenomenon when earnings start to slip and prices continue upward. Market movement like this puts a stretch on multiples. Or, put another way, stocks grow excessively expensive as investors get greedy.
2. External Shock – Markets can suffer from external shocks to their system, including policy errors. For example, if the Fed ratchets interest rates up too quickly, the result can be a damping of economic growth. Other instances where we’ve seen external shock wreak havoc on markets were with Brexit and the debt crisis in Greece. If we use our imaginations, we see that plenty of other exogenous factors could have the same impact – a war, a nuclear reactor meltdown, the list goes on.
But take note that all of these things have happened during this almost decade-long bull run. And, while they have led to corrections of 10, 15, or sometimes near 20%, the S&P 500 has avoided a full-blown, 20% bear market correction. Take a look at Chart A below to see what I mean.
Chart A – S&P 500 Corrections Since March 2009
And, from the exact bottom of 2009, if you timed the market perfectly (anyone? anyone?), you’ve seen more than a 300% run-up. Chart B illustrates this point, and the growth our bull has given us.
Chart B – S&P 500 300%+ Run Since March 2009
3. The Black Widow – Of course wage inflation makes the short list. This is the fatal dagger for markets. When wage inflation strikes, we almost always see the end of economic expansion and the correlating stock market run-up. Based on historical data, wage inflation grows toxic at over 4%.
With this last point in mind, you can imagine all eyes were on Friday’s jobs report. Investors were wondering if the black widow would crawl out of hiding. So far, the answer is no. Average hourly earnings, year-over-year, clipped in at just 2.6%. We can live with 2.6%. It appears that the black widow is receding into the shadows for now.
The market also liked this news. We ended up 3½% at week’s end for the S&P 500, a big chunk of which ticked up on Friday after the jobs report.
What exactly was there to like in the report? For starters, there were 313,000 new jobs. Labor force participation also grew, climbing from 62.7% to 63%. This may seem like chump change, but with an economy as big as ours, one-third of a percent is a big deal. That amounts to approximately 800,000 new folks entering or going back into the labor force. The unemployment rate of 4.1% indicates that most of them found work – 785,000 to be exact. To distill it all down, we had a new, large group of people looking for work, and an equally big group finding new jobs. All of this, with very little wage inflation to speak of.
This fairly benign inflation data kept the Fed from getting too jumpy; we’ve still only seen three small rate hikes this year.
So, for now, it appears that we need not worry about the dreaded wage inflation. Or spiders.