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Is The Bull Dead?

While death is not generally considered to be subjective, there is tiresome debate among the T.V. pundits whether the longest and most hated bull market in history ended during December. The S&P 500 dropped 19.8% from its September 20th high before bottoming on Christmas Eve. Since then stocks have bounced 11.8% and now reside 8% below their all-time highs.

When asked about his demise the Bull responded, “the rumors of my death have been greatly exaggerated”. It appears the Bull may have just been taking a vacation. In prior notes to investors we’ve talked about the silliness of this debate. Somehow the definition of a bear market has come to be known as a drop of 20% or more in stocks. This definition has led to the argument that this bull market must end because it has been going on too long. Analysts often use this type of table to show how long this bull market is when compared to prior bull markets.

This bull market began in March of 2009 following the depths of the credit crisis. Twice this bull market has corrected just shy of 20% before resuming its climb higher. Our view is the bull is alive and well. To reiterate, bull markets do not die of old age. They die because of recessions. Recessions lead to lower earnings, and lower earnings lead to lower stock prices. We do not see any signs that a recession is imminent. While there will certainly be more wild swings in the market, it’s a good time to remind ourselves that stocks should be held for the long run. Trying to time short term fluctuations is a difficult, if not impossible, challenge. As investment managers, we are able to forecast long term market returns with a much higher degree of confidence than short term returns. This latest sell-off reminds us of the 1987 bear market. On October 19th, 1987 the market crashed 22% in one day. The crash was blamed on computer-driven selling which was called “portfolio insurance”. Portfolio insurance algorithms were designed to protect investors by selling stocks when the market started falling. It’s clear that too many people were relying on the same algorithm. The vicious spiral of selling leading to more selling played itself out. What’s similar about 1987 and today is that there was no recession. The economy and earnings continued to grow in 1987. The S&P 500 recovered and rose to a new market high July 26, 1989. Like in 1987, our current volatility is also widely attributed to algorithms, leading to the worst December for stocks since 1931. Here’s where our economy is today. Q3 GDP was 3% and current Q4 GDP forecasts are 2.8%. Payroll employment is rising at an all-time record pace.

As expected, earnings growth is slowing as the one-time accounting benefit of corporate tax cuts rolls off, but earnings growth remains positive as the supply side impact of the tax cuts remain.

Inflation remains low despite the concerns of a tightening labor market. Our latest CPI reading was only 1.2%

Valuations remain reasonable, possibly cheap, with stock multiples of 15.5 times earnings. Our 2019 target for the S&P 500 is 2,950, 11% above its current level. It is based on a multiple of 17X on consensus forward operating earnings.

The Fed has already backed off its plan to raise rates 4 times in 2019. We think the most they will raise is twice, with 1 or even 0 rate hikes a very real possibility. We expect long term rates will remain subdued. Currently 10 year yields are at 2.78%. We expect 10 year bond yields to hover just north of 3% during 2019. This is based on an expected inflation level of 2% and the historical 1% premium investors have earned for holding 10 Year Bonds. We have been heavily overweight domestic vs. international stocks. Domestic stocks have, and we believe will, continue to greatly outperform international stocks. Foreign economies, in particular Europe, continue to slow, while U.S. growth remains robust.

2019 will likely bring more wild market swings. Inspired by Bill Belichick’s 9th trip to the Super Bowl as Head Coach of the Patriots, we will borrow his most famous quote, “do your job”. Our job is to construct portfolios that reflect the underlying economy and market fundamentals, and not let emotion affect our decision making. Despite market volatility and noise in Washington and elsewhere, we know sticking to a disciplined process of investing will achieve long term success. Go Patriots, The GreenPort Team

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