I spent some time earlier this week at the iShares global macro debate.
Jonathan Golub, Chief U.S Market Strategist at RBC Capital Markets opened the show as the equity bull and opposite him, playing the bear, was David Bianco from Deutsche Bank.
Golub kicked it off with the question, “what ends bull markets?” He then paused and allowed the question to digest for a second.
What came out of his mouth next was so simple that I felt embarrassed at the barrage of possible answers I had swirling around in my head.
Recessions end bull markets. For me it was a “doh” moment. Sometimes we get so caught up in the minutiae that we don’t see the forest for the trees.
Golub argued that bull markets don’t get tired, run out of steam, or stop going up because people feel good about stocks. Lousy economies are what kills bull markets, period.
You often hear people scoff, “tell me again what the economy has to do with the stock market?” Granted, neither ISM’s, Beige Books nor all the China PMI’s in the world are going to tell you to go long industrials or short consumer staples, but whoever said that’s a good way to invest? A bad economy is the number one enemy of a bull market, and that is how they are related.
So, where do we currently stand? We have never seen a recession without the yield curve first inverting and we’re not even close there. ISM is in expansionary territory - ditto for average weekly hours, capacity utilization and several other metrics that Golub looks at. If you’re the type of investor that doesn’t like to forecast, things look pretty okay.
Now, just because these indicators aren’t currently flashing sell signals does not mean the economy can’t dip into a recession. However, if a slow down is around the corner, I suspect the market will warn us beforehand.
I suppose, given the action we’ve seen over the last few weeks, the obvious question is: is the market warning us?
Banks are rolling over, momentum names are blowing up and defensive names are leading. The Russell 2000 closed below its 200 day moving average for the first time since 2012 (the streak was 363 days, just one day shy of the all-time record). Stocks are definitely not behaving in 2014 the way they did last year, that’s for sure.
So, are stocks warning us already? Your guess is as good as mine. I certainly don’t spend much time worrying about the next recession. What I can tell you is that getting scared of rallies because of cyclically adjusted P/E ratios, sentiment, or fund flows is a complete waste of time, because a magazine cover won’t kill this bull market, the economy will.
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