The Secular Bull Has Several Years Of Life Left

Since the start of the correction, the consensus view has been that the economy is on the verge of collapse and that stocks have entered a bear market. Also, since the start of the correction, we have been arguing that the economy is not even close to a recession or to the kind of euphoric certitude that market tops are made of. In this piece, we come to the conclusion that the current bull market has between 2 years and 14 years of life left. That may sound crazy, but one often sounds that way when going against the majority.

High-Pressure Economy

A “high-pressure economy” is one that pushes the unemployment rate below what is considered the natural long-term rate. There is no universally accepted definition of where the natural rate of unemployment is, but it is generally defined as the level that is sustainable and does not lead to higher inflation. The U.S. is now in a high-pressure economy with the unemployment rate at 4.0%, which is below the natural rate of 4.6%. High-pressure economies always occur during the later-stages of expansionary periods and as a lead-up to recessions. The question is: How long does an economy remain high-pressure before it falls into recession?

Every expansionary period (the periods between recessions) starts with the unemployment rate above the natural rate, and during each expansionary period there comes a time when the unemployment rate drops below the natural rate (red vertical-lines on the chart below). The ratio of time spent as non-high-pressure, to the time spent as high-pressure has varied in the six expansionary periods occurring since 1960; there were three different ratios found, 1:1, 1:2, and 2:1, with each ratio occurring one-third of the time (chart below).

Source: ANG Traders, Atlanta Fed.

The current expansion turned high-pressure in 2017, eight years into the expansion, and continues to this day, but for how much longer? It could last a further two years if we consider the 2:1 ratio, another six years if the 1:1 ratio happens, and fourteen years more if the 1:2 ratio becomes a reality. That gives us a theoretical range of two to fourteen more years before we see a recession. That sounds crazy, and certainly not what the majority of analysts are saying, but it supports the conclusion that we are not at the start of a bear market.

M2 Velocity

The same pattern emerges from the velocity of the M2 money stock (chart below). In this case, expansionary periods start with decreasing velocity, reach an inflection point (red vertical-lines on the chart below), then increase as a recession approaches (only 1991–2001 was inverted).

Sources: ANG Traders, FRED.

The ratios of the length of the period before the inflection, to the length of the period after the inflection are similar to what we saw above in the non-high/high-pressure ratios. Of the six expansionary periods since 1960, three were 1:1, two were 1:2, and one was 2:1.

The current inflection in the M2 velocity happened 2 years ago (2017) and 8 years after the start of the expansion, which matches the start of the current high-pressure economy and leads to the same timing possibilities for the next recession: 2 years if the ratio is 2:1, 6 years if the ratio is 1:1, and 14 years if the ratio is 1:2. (chart above)

The majority of analysts are calling for the “beginning of the end of the bull”. When you go against the majority, you sound crazy. However, we have found that the majority is wrong the majority of the time. The market is at least 2 years and perhaps as much as 14 years away from a bear market. That is a lot of life left.

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The Secular Bull Has Several Years Of Life Left