Lance also answers the question on everyone’s mind, is the 9 year bull market in stocks over? He also updates current market trends and highlights shorter-term investment strategies, risks, and potential opportunities. – R. Zurrer for Money Talks

The big question for investors at the moment is whether the 9-year old bull market has finally come to its inevitable conclusion or is it just a “pause that refreshes?” 

While the optimistic “hope” is that this is just a pause within a continuing “bull market” advance, from a money management standpoint getting the answer “right” is vastly more important to long-term investing outcomes.

The easiest way to approach this analysis is to start with the following basic premise:

“Bull markets are born on pessimism, grow on skepticism, and die on euphoria.” -Sir John Templeton

Take a look at the chart below which is Robert Shiller’s monthly data back to 1871. The “yellow”triangles show periods of extreme undervaluation while the “red” triangles denote periods of excess valuation.

Not surprisingly, 1901, 1929, 1965, 1999, and 2007 were periods of extreme “euphoria” where “this time is different” was a commonly uttered phrase.

What about today? Is this another period of “euphoria” or are investors still maintaining enough “skepticism” to fuel the bull market further? Unfortunately, there is little evidence investors are “skeptical” of much of anything right now.

“However, for now, there is little doubt the bullish bias exists as individuals continue to hold historically high levels of equity and leverage, chasing yield in the riskiest of areas, and maintaining relatively low levels of cash as shown in the charts below.”

But the “euphoria” of individuals is not just solely related to the stock market, but to the whole economy as well. (The chart below is a composite index of the University of Michigan and Census Bureau measures.)

So, why shouldn’t there be “euphoria?”

The stock market has been surging for the last 9-years, unemployment claims are at the lowest levels in more than 30-years and the housing market seems to be firing on all cylinders.

What’s not to love? But that’s the point.

Bull Markets Die Of Euphoria

The reason that bull markets die of euphoria is that market prices, particularly in the “momentum”stage of the investing cycle, are based on the assumption the current cycle will continue into perpetuity. Earnings, the economy, sales, etc. will continue to expand in a linear fashion…forever.

Since the economy, as well as virtually everything in life, is cyclical, it is only logical that eventually the disappointment of those assumptions sparks the beginning of the next bear market cycle.

Currently, the list of things that could disappoint the markets continues to grow:

• The ongoing rhetoric from Washington over “trade wars” combined with complete fiscal irresponsibility, 
• The reduction in support from Central Banks in terms of liquidity support.
• The continued insistence of the Fed to hike rates which continues to reduce the “low rate supports higher valuations” argument.
• The risk of further contagion from Facebook and other “big data” companies on the technology sector (which comprises roughly 25% of the S&P 500) as global threats of “internet taxes” or other data collection policies are considered.
• Revenue growth continues to remain week which is leading to downward revisions in earnings estimates.
• Both domestic and international economic growth has peaked.
• Inflationary pressures from wage growth remains non-existent while the cost of living continues to rise (this will be exacerbated by Trump’s “trade wars.”)
• The yield curve continues to deteriorate and LIBOR has blown out which have typically been early warning sides of bad outcomes. 

From a fundamental perspective, the bulls are losing much of the argument there as well. As my friend David Rosenberg recently penned (via Mauldin Economics):

“Dave Rosenberg used four different S&P 500 valuation metrics:

• Forward Price to Earnings Ratio
• Price to Sales Ratio
• Price to Book Value Ratio
• Enterprise Value to EBITDA Ratio

He then calculated the percentage of time that each of these had been at its present level or below. Here’s the result for P/E ratio.

The S&P 500 forward P/E ratio has been below its present level 83% of the time since 1990. Repeating that exercise for the other three metrics and then averaging them, Dave found the index is presently at a 92ndpercentile valuation event.

Here’s Dave, from the transcript, with my bold added:

In other words, only 8% of the time in the past has the stock market in the United States been as richly priced as it is today. And if you want to come up with reasons why that’s the case, that’s fine. But just understand that we are extremely pricey. We’re more than just a one standard deviation event versus the historical average.

Dave then showed this surprising table, comparing historic bull markets with GDP change during the same period.

This analysis as well as Martin Armstrong’s Quarterly Closing Post clearly state that it is just not Gold’s time to explode upwards. Jordan indicates below the factors that will have to fall into place before Gold can begin a long term bull swing upwards – R. Zurrer for Money Talks

Last week we noted that Gold’s quarterly close would be a key marker for Gold’s immediate breakout potential. Gold was seemingly on course for its highest quarterly close since 2012 until it reversed back below quarterly resistance at $1330/oz. Hence, an imminent break to the upside is unlikely and gold watchers will have to remain patient. It’s not yet Gold’s time. It will be soon enough. 

One catalyst for the most recent strength in Gold (the correction in equities) appears to have faded as the S&P 500 has held its 200-day moving average. A sustained rebound in equities while bond yields correct would not be particularly bullish for Gold. The obvious reason is capital is flowing into equities and not Gold. A rebound in equities amid a temporary reduction in inflation expectations would equate to stable or rising real yields. 

Click for Larger Chart

Essentially, there are two ways Gold can break to the upside. The first is Gold senses a breakout in long-term bond yields and a sustained rise in inflation expectations. Those developments would soon negatively impact the economy and stock market which would lead to easier Fed policy and ultimately falling real yields. 

The other scenario is bond yields do not break to the upside, there is a slowdown, the stock market declines and the Fed has to reverse course all together. As we predicted in past editorials, long-term yields are trending lower and that could continue. In the meantime, Gold will not break to the upside unless the stock market experiences more turmoil.

In addition to the current macro-market backdrop, history suggests that it may be too early for Gold and gold stocks to begin another bull move. In November we discussed how the gold stocks were following the pattern that other markets followed after a “mega-bear market” (which we define as multi-year and +80% in price).

Take a look at those examples and note the time between the end of the bear market and the next significant low (from which the bull resumed). In most cases the time between those lows is two years and seven to nine months. For the gold stocks it has only been two years and two months since that epic January 2016 low. 

Assuming stocks rebound and long-term bond yields continue to moderate, then Gold is unlikely to breakout this spring. However, that is perfectly okay as our historical study suggests the miners (while facing little downside) may not begin a real bull move for several months. Gold Investors should not be discouraged as they could panic at the absolute worst time (I’m already seeing it anecdotally). Regardless of whether the bull move begins in a few months, five months or whenever, we continue to remain patient while accumulating the juniors we think have 500% return potential over the next 18-24 months.

Jordan

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