The bull market has yet to peak

Although markets have been troubled in recent weeks, we do not believe investors should confuse the current situation with an ending to the bull market that has been in force since early 2009.

Historically, sustained declines in equity prices tend to be associated with economic downturns or earnings recessions, neither of which appears to be in the cards.

Recent events serve as a reminder that the primary risk to the global economy and global markets is the ongoing debt crisis in Europe. Confidence over policymakers’ ability to deal with the crisis took a hit recently given that the election results in Greece and France signal a shift away from governments’ willingness to move forward with unpopular austerity measures.

The resulting political uncertainty and investor confusion has put downward pressure on stocks and other risk assets. The reality is there is no quick fix for Europe’s problems. To date, the European Central Bank and other policymakers have stepped in to provide liquidity and promote some potential long-term solutions, but they have often done so only after financial market turmoil has escalated. Clearly, the debt crisis remains a significant downside risk, but we maintain our view that developments in Europe are unlikely to derail global economic growth.

An additional area of concern is China. Many are worried that China is headed for a hard economic landing and some are forecasting that China may enter into a slowing growth/rising inflation spiral. In our view, such fears are overblown. Chinese growth is slowing, but not at a pace that should trigger any sort of calamity.

Outside of these potential risks, we believe the US economy remains on a slow growth trajectory. The US appears to be in the midst of a manufacturing renaissance as most data is pointing to an expansion in manufacturing activity. Consumer and business sentiment have been improving and we have been seeing some signs of life in the housing market. Additionally, exports have remained resilient and continue to represent an important source of strength.

Corporate earnings remain a bright spot for the US economy. Thanks in large part to low interest rates, improvements in productivity and a lack of upward pressure on labour costs, corporations have been able to maintain and grow their earnings. The pace of earnings growth has slowed compared to recent quarters, but most companies are reporting results that are ahead of expectations.

The labour market, of course, remains an important wildcard. In recent months, we have seen some softening in employment growth. One bright spot is that initial jobless claims have either been declining or holding steady in recent weeks, which may be an indication that the recent softness will be reversed somewhat. Bearish sentiment has increased in recent weeks and confidence has taken a hit.