Remember when trends were all about tie widths and skirt lengths. Now the zigging and zagging of just about everything is tracked. Though, trend-following dates back to the dawn of time—even during biblical times—recall the 7 fat years followed by the 7 lean years.
A trend is a tendency for general movement in one direction. Sometimes, as the saying goes, “The trend is your friend.” This is the order of the day for the stock market. With the U.S. bull market now in its 96th month without a correction exceeding 20%, it’s the second longest bull market in history. Though, Mark Dodson, of Hays Advisory, recently commented that, currently, the trend is your friend but your only friend. That’s because undervaluation, monetary stimulus and negative market psychology are all lacking. These essential elements normally combine to sustain a bull market.
That said, markets can maintain an upward bias for some time, especially if interest rates are low (i.e., opportunity costs of investing elsewhere are low). And, with the continued backdrop of anemic global economic growth (still at a lower pace of real GDP growth than most periods), there continues to be no evidence of a near-term global recession, anathema for stock markets.
Our own Economic Composite (TEC™), designed to alert us to recessions in various regions around the world, is not forecasting a peak in the business cycle. Though U.S. equities have lifted to all-time highs, and are trading just above fair value in our work, bear markets rarely occur without a recession. And, typically, a market peak is accompanied by euphoric sentiment which still isn’t apparent. Contrary to conventional wisdom, markets don’t die of old age but from full or overvaluation as a result of over-exuberance at a time when the economic growth is about to be choked off.
Our TRIM™ stock market indicators, which warned in early '16 (we didn’t weight it too heavily in the absence of the typical overlapping TEC™ alerts), are back on buy in most regions. But, after the recent market run-up, and since the market is currently substantially overbought, we wouldn’t be surprised to see a market correction—averaging about 6% in a bull market.
Meanwhile, we continue to scour for bargains, though our own research, where our search for stocks trading for 85 cents-on-the-dollar or less, is providing the least number of potential investment opportunities in some time. Another reason a correction could be close is that stocks tend to inflect down from TRAC™ ceilings/FMVs (fair market values) once achieved, when they run out of short-term potential, as they appear to have now.
While a stock market correction could occur at any time, we still believe any decline in the near term will likely be modest and that growth and equity prices should continue higher, although likely at a below-average pace.