INSIGHTS

On November 18, 2019

AAM Viewpoints – An Unmatched Bull Market Cycle

Confusion and consternation over the stock market’s relentless ascent into uncharted territory is shared by Wall Streeters and Main Streeters alike. Both camps are seemingly astonished by the durability and elasticity of this bullish cycle, but neither seems convinced that the uptrend is rooted in reality. In fact, for all its record-high feats and the accompanying pace-setting technical trimmings, investor sentiment has remained lodged in tepid optimism for many months with some sentiment readings at their most bearish levels in years. It does not take rocket science, but only a subscription to a daily newspaper, to understand why this might be the case. The drone of news has pitched toward a negative bent for years. Think European Debt Crisis, China economic slowing, the Ebola outbreak and more recently the trade tariffs and the impeachment hearings. These and other headline events have served to tamp down speculation and prevent a squall of enthusiastic buying in a micro theme. The market has not only survived myriad challenges, including the financial crisis of 2007-2008, but flourished in their wake, attesting to the forcefulness of two historically critical underpinnings for stocks: interest rates and earnings. From its earliest stages, these two factors have established and bolstered the foundation of this advance.

The characteristics of this cycle are unmatched by any cycle before it in several important ways. Most notably, the advance has been sponsored by a variety of sectors since the start of the cycle and most of these categories have consistently led the market out of pullbacks both large and small over the span of this bull market run. It is remarkable that this 17-year cycle has remained a macro-driven advance with only fleeting tendencies toward more concentrated buying. And, when a select sector or theme has moved sharply higher near term, the market has routinely policed price and sentiment excesses with orderly rotational consolidations that have not adversely impacted the broader market.

The integrity of the uptrend runs deeper than the structure of the DJIA (Dow Jones Industrial Average) and other major indices. With Homebuilders and Materials joining such core leadership categories as Industrials and Technology in 2019’s advance, industry representation is expanding. This would seem more characteristic of burgeoning market momentum rather than as an ominous sign of an impending market peak. More technically potent than the previous two, we believe this cycle is likely to end only when there is a seismic shift in investor psychology from cautious optimism to bearish surrender and exuberant buying. For this and other reasons, I am raising my ultimate target for the DJIA from 33,000 to 36,000. This forecast is not a sensational gesture, but an acknowledgement that the full buying potential of this cycle has yet to be unleashed. It is also a tip of the hat to the Fed for its transparent monetary policy and prevailing data-dependent stance.