A little more than two years ago, I wrote Goes Down Double-Speed. I wrote it after the market had doubled from its lows two years earlier. I want to update the piece and explain we have learned over the past 2+ years, and maybe discuss what could happen over the next 2+ years. Anyway, here is the modified table of bull and bear markets:
Since the last piece, the gains have come slowly, validating my comment, “But it would be unprecedented for the market to continue to advance at a 3% [per month] pace from here.” In long recoveries, gains first come quickly, then slowly, then near the end they often come quickly again. Things are coming quickly again now, but who can tell how long it might persist.
Maybe Goldman Sachs can tell us. After all they increased their price targets for the S&P 500 yesterday. Now let me republish my updated bull market graphs from the prior piece:
And now look at the cumulative gain:
The predictions of Goldman Sachs are both believable and unbelievable. Believable: it’s not historically impossible for a rally to last that long, or for it to be so large. That said the probability historically has been low.
Unbelievable: Unless revenue growth kicks in, that means the profit margin, already at record highs, will soar to an astounding record. But won’t revenue growth begin again? That’s hard to say, but if revenue growth starts in earnest, the Fed will start removing policy accommodation, because ban lending will be perking up. At that point, it is anyone’s guess as to what will happen. Therefore, I rule out Goldman Sachs’ forecast as a possibility.
The rally continues to get longer in the tooth, and its has been aggressive this year. I repeat how I ended the original piece: “Consider trimming some of your hottest positions.”
By David Merkel, CFA of Aleph Blog