What should seemingly be cause for celebration has investors worried instead: last month, the S&P 500 officially experienced its longest bull market, which is now in its tenth year.
Many investors are concerned with the length of the current economic expansion, said Craig Jerusalim, senior portfolio manager at CIBC Asset Management, during a late August interview. After all, it’s the “longest in North American history,” he added.
Investors’ angst isn’t a surprise if you consider that market valuations are above long-term averages, looking at most metrics, and that the political environment “can be characterized as unprecedented,” he said. Further, global trade issues are “elevating risks, giving investors a lot to worry about.”
Still, when it comes to broader equity markets, Jerusalim is optimistic. He points to positive fundamentals that help justify current market strength. “For example, we have never entered a recession or bear market when employment trends have been as strong as they have been now,” he said.
Read: Investing tips as bull market becomes longest in history
In the U.S., 14 out of the last 15 non-farm payroll reports generated more than 150,000 new jobs each. This exceeded the 120,000 jobs that were needed to keep pace with growth of the U.S. working-age population, and has helped push down the country’s unemployment rate—which fell to 3.9% in July.
While the low unemployment rate could be worrisome, due to the potential for high wage inflation, the labour force participation rate has also been rising and adding to the job pool, said Jerusalim, who manages the Renaissance Canadian Dividend Fund.
Other economic indicators
Purchasing managers’ indexes (PMIs) across the globe have fallen from their peaks but are still expanding, Jerusalim said. And in the U.S., such indexes are especially strong on the back of small business optimism, which is at “multi-year highs.”
One reason is small businesses are benefitting from tax cuts and low commodity prices, alongside healthy earnings growth. “They haven’t begun to fully benefit from the CapEx investments into their own businesses,” Jerusalim said.
The flattening of the yield curve is also commonly considered a risk factor for markets, but there’s no reason to sell stocks unless the curve significantly inverts, he said.
“Historically when the two- to 10-year yield spread is between zero and 50 basis points—like where it is now—markets realize the best average returns with relatively low volatility,” Jerusalim said.
He forecast that economic growth would continue for the foreseeable future, so long as the Federal Reserve continues to raise interest rates in a measured pace. In an Aug. 24 speech, chairman Jerome Powell said the Fed is optimistic about the economy and sticking with its monetary policy approach.
When the tables turn
Despite his current outlook, Jerusalim eventually expects “a 20% drawdown or market correction that takes us into bear territory.” That would present a buying opportunity, provided there aren’t signs of excess—as in 2007 with the real estate market, or with technology in 1999. A repeat event on the same magnitude as those cases is unlikely, he said.
When it comes to the length of the current economic and market cycles, Jerusalim said to consider that North America’s correction in 2007 and 2008 was so deep “that we didn’t have as great a snapback” as in previous cycles.
“The 2.2% annualized growth since 2009 has been the second-slowest pace of expansion since the second World War,” he said.
Going forward, the best-case scenario would be if the market continues to show earnings-per-share growth that exceeds share price growth, he said. That would naturally bring down valuations over time versus rapidly, Jerusalim said.
“I continue to position my portfolios towards companies with strong sales momentum and improving fundamentals, despite this age of expansion,” he said. Those include Spin Master, NFI Group and Premium Brands, which are trading at valuations “well below” their own peak levels.
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