Happy Anniversary to a Raging Bull Market

by / Monday, 13 March 2017

It is widely expected that the Federal Reserve Bank will raise the federal funds rate at its March meeting this week. According to the futures market, there is a greater than 90% chance they will raise rates.

Because a rate increase is so highly anticipated, we expect there will be virtually no market reaction when it occurs. The only way there would be a market reaction is if the Fed announced it was NOT going to raise rates. THAT would be a surprise.

The fed funds rate was below .25% for eight years until December 2015 when it was raised to .5%. Now they’re talking about raising it to .75% (

The reason we even mention this is so you can ignore all the announcements about it. It is a long overdue, non-event and doesn’t deserve your attention or concern. Watch basketball instead.

The Department of Labor reported last week that the economy created 235,000 jobs in February. This number was higher than consensus expectations, but was not out of the ordinary. It is commensurate with the existing pattern of steady job growth. This dropped the jobless rate from 4.8% in January to 4.7%.

We have always said that the president gets way too much credit for a good economy and way too much blame for a bad one. President Trump is not one to shy away from credit (he has already tweeted about the positive job number above). President Trump’s pro-business and pro-investment goals are likely a factor in business owners’ willingness to hire or make capital investments, but it remains to be seen how this optimism will play out.

President Trump’s tweets regarding companies or industries are seeming to have a less significant impact on stock prices. On Tuesday, March 7, he tweeted:

The day he sent that tweet, drug stocks and biotech stocks initially declined, but were right back to their previous prices in two days. It appears that stock markets are beginning to believe that Trump’s bark is worse than his bite. Nevertheless, it almost never fails that when a company CEO has a meeting with Trump, a press release shortly follows, stating that the company is adding jobs (usually a number north of 1,000). This is mostly political theater as many of the announcements are for job additions that were already in the works, such as the 45,000 jobs that Exxon announced they were creating in the Gulf, which coincide with a project that began in 2013.

Since November 8, when Donald Trump was elected president, U.S. stocks are up more than 11% through the end of February. Foreign stocks are up about 6%, and bonds continue to get crushed (-1.25%) as investors assume higher interest rates are inevitable.

For the 12-month period ending February 28, U.S. stocks enjoyed a total return of almost 24% while foreign stocks were up over 19%. Bonds eked out a return of just over 2.25% after selling off the past few months.

March 9 was the 8th anniversary of this bull market, the second longest running bull market since the Great Depression. Over the past eight years, the S&P 500 increased over 20% per year. Of course, it has taken several years of this bull market to erase the sting of losing 55% in 2008-2009.

How does the stock market keep going up, and how long can it last? No one really knows, but as long as markets remain relatively quiet, the bull market can continue.

We have pointed out before that markets perform well during periods of low volatility, and they perform poorly during periods of extreme volatility. Put another way, markets don’t like Metallica. They like Enya.

Below is a graph showing the Volatility Index (VIX) for the past 10 years. In 2008-2009, the S&P 500 declined 55% during a period of EXTREME volatility (METALLICA). The VIX jumped to over 80. Today, volatility is as low as it has been in the entire decade (ENYA). It now hovers around 11 or 12.

The S&P 500 has gone 57 days without a 1% intra-day move, the longest streak in 35 years. In 2008-2009, 1% moves occurred almost every day!

So, until we see less Enya and more Metallica, don’t be surprised if the stock market continues to hit new highs. A VIX reading north of 30 gets our attention.

Getting a good return on your investments over time is a function of several fundamental tenets, one of which is “cost.” Excessive fees and commissions make it difficult to maximize your investment returns. To that end, we were pleased to hear that Charles Schwab, the custodian of our clients’ assets, has reduced transaction commissions almost 50% from $8.95 to $4.95 per transaction.

Schwab didn’t do this out of the goodness of their heart just so you could realize a better return. In January, Schwab undercut its competitors by reducing commissions from $8.95 to $6.95. A few weeks later, Fidelity reduced its commissions from $7.95 to $4.95, which Schwab immediately matched within hours. Competition is wonderful, and capitalism still works.

At Boyer & Corporon Wealth Management, we are finding it an increasingly difficult task to invest in undervalued stocks. The Price-to-Earnings Ratio of the S&P 500 is over 21, well above its historical average. That doesn’t mean it can’t go higher. Bubbles don’t always pop when you expect them to. Sometimes they get bigger, and the eventual POP is louder and messier.

The recent increase in interest rates has provided us an opportunity to deploy cash into bond investments. However, the increased return for taking on higher credit risk in corporate bonds has declined.