6 Things to Consider in the Late Innings of the Market Cycle

By Craig Fehr August 22, 2018

When evaluating the market cycle, a baseball game offers a useful comparison. We think we've entered the latter innings of this current bull market cycle. The good news is we think there's sufficient game time left, so don’t head for the exits. Today, we'll explore six characteristics of the market cycle and how to position as we advance in the later innings.

Let's start by checking the signs. There's no precise script for market cycles, but the current environment is exhibiting several trends that suggest we are in the late phase of the expansion. The Bank of Canada and the U.S. Fed are raising rates, unemployment is cyclically – as well as historically – low, and the yield curve – or the difference between long-term and short-term interest rates – is flattening. These are not indicators that coincide directly with the peak, but instead, take shape as the business and market cycles begin to mature.

Second, late cycle doesn't mean too late. At more than 112 months, this bull market is already well longer than average. But there is no game clock for expansions, so this alone doesn't predict its demise, and the current strength of economic and earnings fundamentals suggests this phase can be extended.

Third, it's not up to chance. That means bull and bear markets aren't random, nor do they abide by the calendar. Historically, the stock market peaked an average of seven months before a recession officially started. We think the risk of a recession in 2018 is very low, and the expansion is showing signs of extending potentially well into or beyond 2019. In other words, over time, the market tends to take its direction from fundamental trends in the economy and corporate performance. We're seeing encouraging signals in those arenas, offering support to the cycle extending from here.

Fourth, the U.S. Federal Reserve will likely be the closer. Tighter monetary policy, specifically from the Fed, will, in our view, be the likely catalyst that ushers in a recession for Canada and the U.S. We think domestic economic imbalances will lead to slower growth in Canada versus the U.S., but we expect positive growth from both economies this year and next. Eventually, however, inflation will move above the Fed’s and Bank of Canada's comfort zone, requiring additional rate hikes and a reduction in the Fed's balance sheet holdings, weighing on GDP growth as we advance.

Number five has to do with returns and expectations. This expansion/bull market is longer than average, and there is a potential for the final innings to be longer than average too. For long-term investors, the goal is not to precisely predict or time the peak, but instead, to position for the late-cycle benefits as well as the potential risks. For context, since 1950, the average stock market return in the final two years of a bull market was 20% per year.1 We don’t believe we’ll match those returns this time, but ongoing gains are, in our view, a reason for investors to stay in their seats.

And, sixth – play your position. As the cycle matures, let your primary guide be your long-term goals and your tolerance for risk. We also think there will be opportunities for prudent diversification and timely adjustments to account for shifting conditions. We think this stage of the cycle will be characterized by:

  • Modest domestic economic growth
  • Greater economic momentum in the U.S.
  • Gradually rising rates
  • Slower but persistent global growth, and
  • Greater balance between positive fundamentals and policy risks

With these six characteristics in mind, talk with your advisor about how you can stay on track as market conditions progress.

Important Information:

1Morningstar Direct. Stocks represented by the total return of the S&P 500 Index. Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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