Are We Nearing the End of the Bull Market?

Jeff Mortimer

Bull markets do not die of old age. Instead, they are often killed when the Fed is forced to raise rates to combat high inflation, leading to an economic stumble.

When my dad taught me to drive, he offered the following advice about driving in the dark: "Don't outdrive your headlights."

It is advice I've been thinking about a lot lately, particularly at client events where I'm often asked, "When will this bull market end?" With the current bull market — the longest in history — and the U.S. expansion about to turn 10 years old in June, many investors are questioning whether it has the strength to keep going.

To answer this question, the Investment Strategy Committee (ISC), which I chair, forms both long- and short-term views of various asset classes across 7- to 10-year, 3- to 5-year and 12- to 18-month time horizons. These perspectives help us think about both short- and long-term risks that might influence when and how this bull market could end. Looking a little ways down the road can help us determine what we should be thinking now.

Our Long-Term Outlook

Our 7- to 10-year view is primarily tied to our work on our capital market assumptions (CMAs), which start with assumptions about growth and inflation and are adjusted to factor in our views of global markets. In our most recent outlook, we stated that we believe in modest economic growth going forward with low to moderate inflation and relatively steady interest rates. Our 10-year CMAs forecast more modest equity gains of 6 to 8% going forward, while also expecting a total return on fixed income investments roughly equal to today's current yields.

The 3- to 5-year time horizon allows the ISC to consider more intermediate-term variables. Valuation certainly plays a role here, but so do industry trends, global fiscal and monetary policy, consumer and business confidence, employment data and long-term measures of inflation. When we look at the markets through these lenses, we continue to generally like what we see. Global monetary conditions remain accommodative, confidence remains at very high levels, employment remains strong (especially in the U.S.) and valuations for most asset classes are reasonable.

Short-Term Outlook

With our long-term view as a foundation, we now incorporate a short-term view of asset class relationships over a 12- to 18-month time horizon. Our ability to develop forward-looking views for this shorter window of time ensures that we do not outdrive our headlights. Instead, we analyze key variables that help us determine whether our short-term view differs from our longer-term views and whether we need to make any shifts to our asset allocation. This short-term view, combined with the long-term context, allows us to better navigate the terrain that is right in front of us while never losing sight of our ultimate destination.

Some of the key variables we analyze are valuation, short-term measures of inflation, market sentiment, purchasing managers indexes, leading economic indicators, and changes to central bank and fiscal policies. Currently, the strength of these combined variables gives us confidence that consumers will continue to spend and businesses will continue to invest, at least in the short term. Inflationary pressures remain muted, causing the Fed and other central banks to take a more patient approach to monetary policy. We do not see a recession in 2019 or even 2020. This economic backdrop should bode well for global stock markets as we believe equities should continue to move modestly higher over the coming quarters, albeit with some fits and starts as variables such as inflation, U.S.-China trade, or a questioning of the Fed's pivot may periodically come into focus.

Variable to Watch: Inflation

Inflation is a key variable that impacts financial markets over both short- and long-term time horizons. Inflation has been especially tame for the last decade. A few long-term trends may shed some light as to why. First, the global demographic trend toward a higher median age puts downward pressure on inflation as older adults tend to save more than spend. This leads to lower yields as they compete to purchase low-risk bonds. Second, technology, especially as it relates to price discovery (the ability of a consumer to compare prices between sellers), also puts downward pressure on prices. It makes it very difficult for any single seller to raise prices, helping keep a lid on inflation. Finally, the short term, productivity has also started showing signs of accelerating. This improvement is disinflationary as it allows businesses to increase their profit margin without raising prices because workers are more effective at pushing out more products or services. All three of these trends keep inflation well-contained, which is a very good outcome for investors. Low inflation allows the Fed to continue to be patient about raising rates.

Fed on Pause

The current softness in inflationary pressure and slowing economic growth led the Fed to shift to a more dovish monetary stance in early 2019. Jobs, housing and sentiment data have looked more promising recently, which supports our expectation for economic activity to pick up in the second half of the year. Even with better economic activity, we believe the Fed will remain on hold largely because its preferred measure of inflation, the personal consumption expenditures (PCE) index, is still below its 2% target.

Trade and Tariffs

While markets have rebounded somewhat following the weakness in global growth during the final quarter of 2018, the current escalation in trade tensions could end up weighing on growth and corporate profits if both sides are unable to reach a resolution soon. Given that China exports roughly $540 billion to the U.S. compared to the $120 billion of goods it imports from the U.S., they clearly would feel the brunt of the economic pain. Most economists believe that trade tariffs will result in about a 0.5% decline in U.S. GDP and 1.0% decline in China's GDP over a year. But if President Donald Trump moves forward with an additional round of tariffs on $325 billion of Chinese imports — essentially, consumer goods — the cost could weigh on corporate profits if not passed along to consumers.

Our base case remains that the U.S. and China will reach some time type of modest deal, but it is difficult to know what that may look like at this time. We could see all tariffs come off, agreement on some structural reform or a combination of the two. But the longer the uncertainty continues, the greater the potential negative impact to growth. With that said, we believe the U.S. economy is strong enough to withstand a possible drag from the trade tensions, but we will continue to monitor developments to see if it changes our forecast for a continued but slow global expansion.


Bull markets do not die of old age. Instead, they are often killed when the Fed is forced to raise rates to combat high inflation, leading to an economic stumble. For now, we do not think the Fed will need to raise rates any time soon. But just as my dad taught me about not outdriving my headlights, the ISC will continue to look into the future, analyzing variables across multiple time horizons in order to determine when this economic and market cycle may end. At this point in time, at least as far as we can see, the coast looks clear.

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