There is an overwhelming feeling among market participants that this Bull Market is about to end any day now. I keep hearing the same phrases over and over: “We are obviously late in the economic cycle” and the Bull Market is in its “late stages.” One thing I’ve learned from 20 years of experience is that moves in the market can go on MUCH longer than most people expect. Here are three reasons why we are not “late stage.”
1) Psychology. The market tends to fool the majority and almost everyone thinks we are late stage. I understand why they think this way because most people’s minds are wired for stress and fear. Many are constantly focused on what can go wrong next. I’m not saying there aren’t any challenges, but considering all the negative news over the past few years, the market and the economy have been very resilient. It’s tough to see a market top when most people are fearful and expecting it.
2) Earnings. The recent quarterly earnings reports from many market leaders showed incredible acceleration in growth and profit margins. A few examples: No one thought Facebook would survive its recent scrutiny but they beat expectations and didn’t hint of any slowdown in users. Amazon was expected to earn $1.25 per share and reported $3.27! That’s not a beat, that’s annihilation! The analysts should be embarrassed. Seven analysts came out very cautious ahead of Apple’s numbers and were once again proven wrong. Betting against Apple is like betting against the Harlem Globetrotters. Netflix has beat new subscriber estimates by 1-2 million in the past two quarters and they are just starting to expand internationally. No way anyone would touch Chipotle going into their last quarter and they beat estimates by 36%. One consistent theme going into these and many other reports was the negativity and doubt that companies cannot continue to execute at high levels. Once again, they proved us wrong.
3) Slow and Steady. Over the past 8 or 9 years, the economy was never in an explosive growth stage. We have simply been growing GDP at 1.5-2.5% per year. Why can’t this continue for a while? Why can’t it accelerate to 3% or higher? The economy has never gotten overheated during this time and when stock market bullishness gets too excessive, the market has a unique way or correcting itself.
Bottom line: We are about to head into what I believe will be year three of a possible five year Bull Market. I’ve been writing about this for a while now and presented the 1987-2000 analogy in the chart above. We are not in a nine year Bull Market. The new Bull Market started in July 2016 after Brexit and can continue to accelerate for a while. Here’s the catch: It won’t be easy. There will be corrections, shakeouts and pullbacks along the way, similar to the one we are having now. Many of these corrections will be sharp and very convincing that the Bull Market is over. The biggest challenge for investors will be sticking to your investment process and having conviction during the corrections. While many have called for a top, I’m one of the few saying this Bull Market still has a long way to go. It might even accelerate and surprise to the upside if you have some patience.
I can be reached at: jfahmy@zorcapital.com.
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