Fixed Income

Will This Bull Market Persist?

This secular bull market—the least loved in memory—is now more than 100 months old, and up by 265%…

This secular bull market—the least loved in memory—is now more than 100 months old, and up by 265% from its bottom on March 9, 2009.1 It is also the second longest bull market on record (after the 1990s’ dot-com boom) and fourth largest in terms of market advance.

For some investors, the sheer age of this cycle is enough to cause consternation. Yet there is nothing magical about the passage of time. As we have said time and again, bull markets do not die of old age. Like people, bull markets ultimately die when the system can no longer fight off maladies. In order for the cycle to end there needs to be a catalyst—either a major policy mistake or a significant economic disruption in one of the world’s major economies. In our view, neither appears to be in the offing:

Global growth is sufficiently modest. The “accidental” synchronized global expansion (so-called accidental because it was more of a coincidence than a coordinated effort by global policymakers) is already fading, but slowing growth in the United States and China does not foretell a crisis.
The United States, nine years into this market cycle, has not exhibited the excesses that are indicative of typical economic downturns.
For its part, China’s high leverage poses a threat to its financial stability, but government actions are likely to be gradual to ensure a phased pace of deleveraging while maintaining growth stability.
We believe that low inflation globally will provide cover for policymakers to be more accommodative than many expect.

We are optimistic that this cycle will ultimately be the longest on record, though we do not believe our view is Pollyannaish. We will continue looking out for telltale signs indicating the end of the current cycle, even as we believe that none of them are forthcoming:

U.S. and/or European inflation increases more rapidly: If inflation picks up meaningfully in the developed world and tighter policy commences, then the cycle will likely be curtailed.
High-yield credit spreads widen: The bond market is usually a good indicator of the end of a cycle. Cycles end with the yield curve inverting and high-yield credit spreads blowing out. An equity market sell-off typically follows soon thereafter.
The 10-Year U.S. Treasury rate falls and the yield curve flattens: The 10-Year Treasury rate will reflect the real growth and inflation expectations of bond market participants. A flattening yield curve driven by the decline of long-term rates would be an ominous sign for the U.S. and global economy.
The U.S. dollar strengthens versus emerging market currencies: A flight of capital from emerging markets to the United States would slow growth among the former—which are major drivers of economic activity—and potentially cause another earnings recession for U.S. multinational companies.