The Bull Is Living on Borrowed Time


If stock prices continue to rise, as they have for the last couple of weeks, then some time within the next month or so this bull market will become the longest since World War II.

That’s right: This most unloved of all bulls may last longer than the 1990s stock bubble, which went from irrational exuberance to dotcom euphoria before crashing back down to earth.

Before Thursday’s modest sell-off, the S&P 500 index was less than 60 points below its all-time closing high of 2872.87, set January 26th. The Dow Jones Industrial Average was a more sizable 1,400 points from its late January peak. The Nasdaq Composite index actually hit its all-time high on Tuesday. All three major indices have bounced back nicely from their double-bottom lows in early February and early April.

We at GoldenEgg Investing® always thought the late January-early February sell-off was a correction, not the beginning of a new bear. The fundamentals—economic growth and earnings—are just too good to be derailed  by anything less than a recession, full-blown trade war or actual war, all of which are possible, but not likely just yet.

But if the market manages to top its late January all-time high and keeps moving higher, it will face a couple of big barriers to further advancement.

First, the yield curve—the spread between the ten- and two-year Treasuries—is a mere 24 points, the tightest it’s been since 2008. An inverted yield curve (when the two year yields more than the ten year) has been a very reliable predictor of recessions because it shows bond investors expect slower growth in the long run. This is something to watch carefully as it develops.

Second, the market’s big gains have been driven disproportionately by the big FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google parent Alphabet). Howard Silverblatt of S&P Dow Jones Indices calculates that the five FAANGs have accounted for more than a quarter of the S&P’s total gains this year.

The market capitalization of the five FAANGs is around $5 trillion, almost equal to the market value of the smallest 282 S&P 500 companies, the Financial Times’ John Authers reported. So much for value investing! Add in Microsoft and those six stocks would represent the largest single S&P sector, comprising 17 percent of the market value of the whole S&P.

This kind of structural imbalance won’t last forever. At some point the high flyers will correct and bring down the rest of the market with them. Right now we can’t see either a bear market or recession on the horizon, but if we learned anything in the 21st century, it’s that things can change very quickly and you need to be prepared.