by Jason D. Norris, CFA
Executive Vice President of Research
Earlier this week, The Eagles’ Greatest Hits surpassed Michael Jackson’s Thriller as the best-selling album of all time. I would argue that “greatest hits” albums should be excluded, but that’s neither here nor there. Also, this month, the S&P 500 set the record for the longest streak without a 20 percent decline, or bull market. This trend started in March of 2009 and has lasted over 3500 days. The previous feat was the 1990s bull market which finally ended with the burst of the Internet Bubble in 2001.
Heartache Tonight
The most amazing item about this run in U.S. equities is the lack of participation of the average investor. While it is difficult to always be able to sell at the top and buy at the bottom, investors have been skeptical of this rally the entire time. The chart below highlights the rise in the S&P 500, coupled with fund flows of U.S. equity mutual funds and exchange traded funds (ETFs).
Over the last 114 months, investors sold over $850 billion in U.S. stock funds and ETFs - and that selling occurred 70 percent of the time. Another observation is the increased selling we have seen the last two years with stocks continuing to climb “the wall of worry”.
This measure doesn’t reflect all equity investors; however, it is a good proxy for the average retail investors, since they are the most likely to be using mutual funds and ETFs. We have found this to be a pretty accurate reflection of the skepticism in the investor base. One of the best things as a firm we have done since 2009 was to keep our clients invested and, for the majority of the time, overweight U.S. equities.
The New Kid in Town
If investors are selling, who’s buying? While institutions, pension plans, etc. continue to be buyers of equities, what we’ve seen is almost a tripling of corporate stock buybacks over the last several years. The chart below compares the annual fund flows data with U.S. corporate stock purchases.
With profit margins at high levels and slow economic growth the last several years, companies have been actively buying back stock; with an expected peak this year of over $800 billion. The increase in 2018 is driven primarily by the U.S. corporate tax cut.
How Long?
Bull markets don’t die of old age. Recessions, and/or bubbles bursting, are usually the culprit. The last two bull runs ended with the popping of the tech bubble and the housing/credit bubble. We currently don’t see any excesses in the economy that would put this run at risk. The factor we are focusing on is the Federal Reserve and how aggressive they raise rates. If inflation begins to pick up and the Federal Reserve has to hike aggressively, this would likely push the U.S. economy into recession, resulting in the end of the bull market. We do not see this in the near-term; however, we are closer to the end then the beginning.
Finally, there has been chatter regarding the markets and possible impeachment. We believe, if this were on the table, it would be noise. Looking back at the 1970s (Nixon) and 1990s (Clinton), investors focused on the economy. If the tax cuts were rolled back, that would be a negative but otherwise, just noise.
Week in Review
Stocks reached all-time highs this week in the face of noise in DC. It was a risk-on week with Small Cap growth leading the way. The S&P 500 finished the week up just under 1 percent. Comments out of Jackson Hole from the Fed confirmed the view that two more rate hikes are in the cards for 2018. This resulted in a slight drop in the 10-year U.S. Treasury to 2.82 percent.
Takeaways for the Week
- Strong economic growth should trump DC noise resulting in a continuation of the bull run
- Retail investors still remain skittish of the strength in U.S. stocks