Impact Blog
Why the bull market may continue

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      By Bill Hackney, Atlanta Capital Management

      Atlanta - The great bull market in stocks that began in the depths of the 2009 recession continues to confound the pessimists.

      Year-to-date through September 10, the S&P 500 Index is up a respectable 7.6%. The tech-heavy NASDAQ Composite Index and small-cap Russell 2000 Index are both up even more. The bull market has been going on for over nine years and is getting old, by historical standards of longevity.

      However, the five indicators I watch to gauge the health of the equity market suggest that there is plenty of life left in the bull.

      In the table below, I list five early warning signs which I've found useful when looking for the end of a bull market, or the beginning of a bear market. When three of the five indicators turn negative (red), I will turn negative on the outlook for stocks.

      Blog Image Hackney Indicators Sept 18

      My goal in using these indicators is to attempt to identify multi-month, 20%-plus declines in the market that are usually associated with a recession -- not the 5% to 15% declines that more frequently pockmark the investment landscape.

      As seen in the table, there has been no change in my indicators since the beginning of the year. Only one of the five indicators is bearish -- the stock market's price-to-earnings ratio (P/E). Corporate earnings in 2018 have been surging, thanks to a strong economy and a cut in the corporate tax rate. So, despite the gain in stock prices, the market's P/E has fallen slightly this year.

      I've scored two indicators as yellow -- or on the watch list, you might say. The spread between short-term interest rates and long-term rates has been narrowing over the past year. However, the gap between the federal funds rate and 10-year Treasury yield is still about 100 basis points (1%), and the announced pace of Federal Reserve tightening suggests an inverted yield curve is a year or more away.

      The other indicator on the watch list is wage inflation. Labor markets are tight and wage pressures are likely to accelerate. I wouldn't be surprised if wage inflation was the next indicator to turn negative. It could be a late 2019 event, however.

      Bottom line: The five indicators I watch for a potential end to the current bull market are still signaling that the equity market has fuel to move higher.