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A Monster Bull is About to Run

Written By Briton Ryle

Posted November 21, 2014

If you thought the recent bull run since the last market bottom of 2009 has been pretty impressive thus far, you ain’t seen nothing yet. Are you ready for S&P 6,000? Or Dow Jones 50,000?

A very telling sign was given to us yesterday that signals we are about to enter a period of monumental growth and expansion not just in the nation’s economic output but also in the nation’s equity markets. Get ready for another 1990’s extravaganza.

Yesterday’s release of the Philadelphia Fed Manufacturing Index showed a reading of 40.8 – the highest level since December of 1993. Contrary to stock market peaks which are followed by crashes, peaks in the manufacturing index mean the economy is just starting to warm up.

But aren’t we currently in a much different economic environment than we were in during the early 1990’s? After all, the Federal Reserve is getting ready to raise interest rates which always puts a brake on economic expansion and kills equity bulls dead.

Not always. In fact, America is today pretty much where it was at the beginning of that remarkable 1990’s bull run. We have good reason to believe that even with the upcoming interest rate hikes, the economic boom that followed then is about to happen again.

Strongest Reading in Decades

The Philadelphia Fed Manufacturing Index is a gauge that measures changes in business growth as monitored by one of the twelve banks that make up the U.S. Federal Reserve central bank system.

“The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities,” Investopedia describes what is known as the “Philly Fed Survey”. “The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction.”

As depicted in the graph below, the Philly Fed index – now at 40.8 – has not been above 40.0 since December of 1993. Both then and now, the economy was mending after a severe recession, with the Philly Fed index rising from minus 40 (manufacturing contraction) to plus 40 (manufacturing expansion), as shown by the green lines in the graph below.

Bull Run chart 1


It took a few years for manufacturing to recover in the early 90’s, but once it did, the nation entered a period of sustained manufacturing expansion (orange box) which lasted more than 7 years from that monumental +40 reading until the crash of 2001.

What did the stock market do during those 7 years? As plotted below, the broader market S&P 500 index rose some 239% from 450 in 1993 to 1,525 in 2000. Similarly, the Dow Jones Industrial Average index ran from 3,500 to 11,500 during that run for a gain of 229%.

bull run chart 2


Rate Hikes Won’t Stop the Bull – Yet

But won’t higher interest rates which the U.S. Federal Reserve will soon have to start raising impede economic growth in the U.S.? How can we have a raging bull market when rising interest rates make money more expensive to borrow, limiting borrowing which in turn limit both consumer and corporate spending?

A look at the past answers those questions with a definitive “No”. As noted below in a graph of the U.S. Federal Reserve’s benchmark Fed Funds Interest Rate, rising interest rates did not put a brake on economic expansion nor the equity bull market during the Great Bull Run of the 1990’s.

Looking at the Fed’s actions back then we notice a similar pattern to where the Fed is today. During the correction from 1990-92, the Fed lowered interest rates dramatically from 8% to 3% (red). After a period of no rate changes to allow the ailing economy to heal, the Fed raised interest rates rather sharply from 1994-95 (green). But as noted in the S&P graph above, rising interest rates did not stop the bull from running.

bull run chart 3


After a period of relatively flat interest rates from 1995-98 (blue), the Fed began to feel a little nervous with the relentless climb of the equities market, prompting then Chairman Greenspan to call the euphoric investment sentiment of the time “irrational exuberance”. In an effort to “take the punch bowl away” from the clearly intoxicated stock market, the Fed again raised interest rates from 1999-2000 (orange), during which time the equity bull just kept right on running.

Unfortunately, the relentless bull run throughout the 1990’s ran much too far ahead of underlying economic growth, with the second wave of rising interest rates finally took the bull down, causing the market to crash in 2001.

All Clear To 2020

Thus, it isn’t necessarily rising interest rates that take a bull down, but it is rising rates coupled with an already tired and overextended stock market. Though we may be entering a period of rising interest rates soon, we are definitely not in a period of a tired, overextended stock market. The party is just getting started, and the punch bowls are still coming.

The Federal Reserve has assured us that now that the Quantitative Easing measures have ceased, interest rates will remain low for a “considerable time”. Even when interest rates do begin to rise, economists expect the Fed to stop lifting them soon, perhaps upon reaching 3% or so by around 2017.

At that point, the markets will enter another period of relatively steady interest rates as we saw from 1995-1999 (blue in the graph above), during which time the bull just keep right on running. It wasn’t until that final wave of interest rate hikes at the end of the 1990’s that the bull finally gave out.

We can thus expect economic growth to continue even during rising interest rates, with the equity bull continuing right along with it. Investors should fear the Fed’s first wave of rising rates. It’s the second wave we need to worry about.

But if history is any gauge at all, we won’t have to worry about that second wave until around 2020 or so. And if history does indeed repeat itself, the upcoming monster bull run should propel markets some 200% higher.

Over how long a period of time? The last monster bull ran for some 10 years from market bottom (1991) until market implosion (2001). This monster bull running with us today could similarly run an entire decade as well, from the 2009 market bottom until a 2019 or 2020 market crash.

Until then, dip your mug into the stock market bowl. There are plenty of roaring good times ahead.

Joseph Cafariello