In writing my latest Thoughts from the Frontline, I reached out to my contacts looking for an uber-bull—someone utterly convinced that the market is on solid ground, with good evidence for their view.
Fortunately, a good friend who must remain nameless shared with me an August 4 slide deck from Krishna Memani, Chief Investment Officer of Oppenheimer Funds.
The current bull market is the second longest and has the third-highest gain. It will be the longest stock bull market of the modern era if it can last another two years or so.
However, he thinks the present bull market will continue for another year.
For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing.
15 Events That Could Be a Catalyst for the Next Recession
He goes on to list 15 specific events he thinks would be necessary to make him abandon his bullish position. (Comments in parentheses and italics are mine.)
1. Global growth would have had to decelerate. It is not.
(European growth is actually picking up. Germany blinked on financing Italian bank debt, and the markets now have more confidence that Draghi can do whatever it takes.)
2. Wages and inflation would have had to rise. They are not.
3. The Fed would have planned to tighten monetary policy significantly. It is not.
(They should have been raising rates four years ago. It is too late in the cycle now. They may raise rates once more, but the paltry amount of “quantitative tightening” they are likely to do is not going to amount to much. In fact, if for some reason they decided to go further with rate hike and enter a tightening cycle, their monetary policy error would probably trigger a recession and a deep bear market. I think they realize that—or at least I hope they do.)
4. The ECB would have to tighten policy substantially. It will likely not.
(Draghi will go through the motions, though he knows he is limited in what he can actually do – unless for some unexpected reason Europe takes off to the upside. And while Eastern Europe is actually doing that, “Old Europe” is not.)
5. Credit growth would have had to be surging. It is not.
(Credit growth is generally picking up but not surging. And most of the credit growth is in government debt.)
6. Corporate animal spirits would have been taking off. They are not.
(That is basically true for most public corporations. There are a number of private companies and smaller businesses that are pretty optimistic.)
7. Equities would have had to be expensive relative to bonds. They are not.
8. FAANG stocks would have had to be at extreme valuations. They are not.
(I don’t think I buy this one.)
9. Investors would have had to be euphoric about equities. They are not.
10. The current cyclical rally within the secular bull would have had to be old and stretched. It is not.
(Not buying this one either.)
(I pay attention to high-yield spreads, a classic warning sign of a turn in market behavior. Are they at dangerous levels? Damn, Skippy, I cannot believe some of the bonds that are being sold out in the marketplace. Not that I can’t believe the sellers are willing to take the money—you’d have to be an idiot not to take free money with no strings attached. I just don’t understand why major institutions are buying this nonsense.)
12. The classic signs of excess would have had to be evident. They are not.
(Kind of, sort of, but we are really beginning to stretch the point.)
13. China’s credit binge would have had to threaten the global financial system. It does not.
(Xi has somehow managed to push off the credit crisis, at least for the rest of this year, until after the five-year Congress. Rather amazing.)
14. Global trade would have had to be weakening. It is not.
15. The US dollar would have had to be strengthening. It is not.
That’s quite a list. Seeing it with the charts and Memani’s comments makes it even more compelling. To pick just one for closer scrutiny, let’s consider #7.
Are Equities Expensive Relative to Bonds?
That’s a good question because it really matters to big, long-term investors like pension funds.
Pension fund managers need to meet certain return targets, and they want to put the odds on their side. Treasury bonds offer certainty—presuming the US government doesn’t default. (Ask me about that again in October.)
Stocks may offer higher returns but more variation.
Memani explains this relationship by looking at earnings yield. That’s the inverse of the P/E ratio.
Essentially, it’s the percentage of each dollar invested in a stock that comes back as profits. Some gets distributed via dividends, buybacks, etc., and some is retained.
If you think there’s a stock mania today akin to the euphoria of the late 1990s, you’ll find no support in this ratio. Back then, bonds were dirt cheap compared to stock market earnings yield.
Now we have the reverse: stocks are cheap compared to bonds.
This is one of the most convincing bullish arguments I see now.
I remember the late ’90s very well. I called the top about three years early, never dreaming we could see a year like 1999. That will always be my mania benchmark—and today we are not even remotely near it. I don’t remember thinking much about bonds back then. No one else was, either.
But buying them would have turned out much better than buying stocks in 1997–99.
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