Recessions and falling corporate earnings kill bull markets
This week the current bull market will become the longest on record. But instead of celebration, this event will most likely trigger multiple headlines warning of a stock market top. Investors should resist the urge to sell this market.
The chart below covers the last ten years for the S&P 500 with the bear market of 2008-9 shaded in pink and in blue all the corrections since then of more than 5%. The labels along the bottom of the chart tell us the percentage loss during each shaded period — and in parentheses, the duration of each downdraft in days.
The absence of a prolonged correction since 2016 can be explained by a resumption of earnings growth beginning in the summer of 2016 (before the election). This year earnings are up over 20% when compared with 2017 and analysts think there’s much more to come.
Based on what we see in our portfolio companies’ results, profit growth looks strong well into 2019.
We will stay alert to signs of economic recession and falling profits. Of the two, a recession is the event that will end this bull market and force us to reign in our relentless optimism.
It’s much too early to say, “Look out below!” We prefer “Lookout above!”
Daniel A. Ogden