The Bull turned 10 years old last Saturday, March 9th. After the credit crisis and financial meltdown of 2008, the S&P 500 bottomed on March 9th of 2009 at 676.53. The S&P 500 lost more than half its value before bottoming. Since then stocks have rewarded risk takers with a 320% return. It’s a great reminder of how risk and reward work in markets, and in life. Taking the easy road is seldom the most rewarding. During this bull market stocks have had several pullbacks, threatening the 20% threshold that defines the end of a bull market. The most recent pullback bottomed out on Christmas Eve. The S&P 500 corrected 19.8% from its September 20th all-time high. Today the Bull is grazing about 4% below its all-time high and has shifted from bear to bull phase.
We’ve previously written about the silliness of defining what is and isn’t a bull market. https://www.greenportcapitaladvisors.com Nevertheless, we never turn down an excuse for a good party. So, let’s celebrate and wish this Bull many more years of health and happiness. We’ve also asked the Bull to come in for his annual physical with Dr. GreenPort. After all, we are hoping the Bull will live to see 11. Dr. GreenPort - “How are you feeling, we are little concerned about your cholesterol”. Bull - “I’m made of steak, of course my cholesterol is high. I’m feeling great. However, for some reason lots of people think I’m going to die soon. There are lots of bears that think I should have died a long time ago.” Dr. GreenPort – “Let’s check your vitals; earnings, revenues, and valuation.” The bears continue to warn us of an earnings recession during the first half of this year. Importantly, very few bears are also calling for a revenue recession. In order for there to be an earnings recession, without a revenue recession, profit margins most fall. If profit margins remained unchanged, earnings would grow at the same rate as revenue. We believe the bears are incorrectly analyzing the recent drop in profit margins. We believe the YOY drop in profit margins is due to the base effect of last year’s tax cut rolling off. Profit margins going forward should be fine. Bears counter that the fall in profit margins are the result of a systematic rise in costs, namely inflation. We’ve written many times about why we believe inflation is not an issue. Globalization, technology, and demographics make deflation a bigger risk than inflation. We see earnings growth modestly slower for 2019, and then rebounding in 2020. Revenues remain impressive for both 2019 and 2020. S&P 500 revenues made new record highs during Q4 and are forecast to grow 6.2% in 2019. We think earnings and revenues show a healthy bull for 2019.
Valuation is reasonable. We’ve always had a love-hate relationship with valuation. While valuation is the cornerstone of any viable forecasting process, valuation has always struggled with getting the timing right. Our year end forecast of 2950 on the S&P 500 is based on our projected earnings and a 17X multiple for price. Given the low inflation and interest rate environment, a multiple of 17 is reasonable, perhaps even conservative. The S&P 500’s current multiple is 16.4X. For reasons we are still trying to sort out, this multiple dropped to 13X in December before rebounding to its current level.
What else could kill the bull? Our biggest fear was the Federal Reserve’s overly aggressive tightening policy. Fed Chairmen Bullard has clearly changed his tune. He now likes the words “patience” and “data dependent”. We like those words too. We have a global economy that is clearly decelerating. That also concerns us, but we believe the U.S. economy, 70% of which is driven by the U.S. consumer, can handle the anemic growth rates of Europe and Asia. We are giving the Bull a clean bill of health and look forward to his next physical on his 11th birthday. Should the Bull live to be 50, we will be subcontracting that physical out to another doctor. Viva El Toro, The GreenPort Team.