Market Cycle on Steroids Leaves Wall Street Guessing What’s Next

Early, middle, or late? For stock investors who believe the past is prologue, it’s a mystery that matters.

Wall Street wants the answer to what sounds like an easy question: how old is the bull market? That depends, of course, on what you consider its birthday. Is it the end of the financial crisis, the end of the Covid-19 rout 11 years later, or some other point in time?

Roughly three camps exist. Long-lifers consider last year’s rout a hiccup, and therefore say the rally is nearing expiration. New bulls view the last 14 months as the first leg of a powerful rally just getting started. There’s also an in-between set who say that while this may be a new phase, it’s one where time is passing at warp speed.

“It relates to the uniqueness of the cycle. This is not your traditional economic expansion,” said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “There’s still so much uncertainty that it creates a wide range of outcomes.”

Market Cycle on Steroids Leaves Wall Street Guessing What’s Next

No question we live in interesting times. Economists are struggling to forecast the most widely followed data, missing numbers on the consumer price index and the jobs report, among others, by huge margins. At the same time, many strategists have been rushing to upgrade their year-end projections as the market runs ahead of even some of the most bullish cases.

So, where in the cycle are we? Here are some views:

Still Early

While everything from investor euphoria to record equity issuance suggests a maturing bull market, Citigroup Inc. strategists led by Robert Buckland highlight one thing that points to it still being early: earnings.

Market Cycle on Steroids Leaves Wall Street Guessing What’s Next

Corporate profits worldwide troughed last November amid pandemic lockdowns, meaning (by this logic) that the market is still in the first year of a recovery cycle when it comes to the bottom line. As the global economy reopens, earnings are expected to surge 36% in 2021, analyst estimates compiled by Citi show.

So whatever doubts bears are casting over the 14-month equity rally, in the eyes of Buckland, the current fundamental underpinning is too strong to ignore. In fact, his team found that since 1976, there have been no years when earnings are up more than 25% and the market is down.

“We would buy into any short-term dip in the markets and cyclical stocks in particular,” Buckland wrote in a note Thursday. “It’s too early to give up on the recovery trade.”

Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company, says the economic cycle -- which is tied to market cycles -- is also in its early stage.

“Economic cycles in the past, they were much more erratic and much shorter than the past two or three that we’ve had,” meaning that this one could be a shorter one, he said. “The question is how fast does the cycle progress?”

Middle Part

Mike Wilson at Morgan Stanley says the market’s entered the middle part of the cycle faster than normal. And with that comes a change in leadership.

The firm’s chief U.S. equity strategist has in recent weeks started to pivot away from recommending early-cycle and re-opening beneficiaries -- he downgraded consumer discretionary, for instance. Instead, he recommends investors favor the reflation trade -- including financials and materials -- as well as reasonably priced growth stocks, which can be found in the health care sector and certain parts of communication services. The net effect is a tug-of-war between earnings and valuation, tepid returns over the next 12 months, and a likely 10-20% correction over the stretch should profits stand still.

“This recession and recovery is unique for a number of reasons, not the least of which is its velocity, down and up,” he wrote in a note subtitled “Mid-Cycle Brings More Risk than Reward.” “The rapid recovery has us entering a mid-cycle environment only one year in, and market internals are reflecting that.”

Market Cycle on Steroids Leaves Wall Street Guessing What’s Next

Meanwhile, Emily Roland, co-chief investment strategist at John Hancock Investment Management, says fundamentals and earnings growth start to matter more during the mid-phase of the cycle, which is what she’s starting to see now.

“We have to start to think about the fact that peak stimulus and peak easing financial conditions are going to be coming into the rear-view mirror as we move throughout the year here,” she said in a phone interview. “The fundamental support for this bull market is still in place here, but we do think it’s going to come with a lot more choppiness as we head into year two and three and into the middle part of this cycle.”

Read more: Leuthold Warns Pause Stage is Coming in Bull Run: Taking Stock

Late Stage

When StoneX’s Vincent Deluard considers the speed with which the S&P 500 recovered from 2020’s lows, he comes to one conclusion: the market’s still in the same pre-pandemic cycle.

The massive increase in equity issuance on extraordinary valuations is “not something you’d see at a bottom,” the global macro strategist said on a recent episode of Bloomberg’s “What Goes Up” podcast. At the same time, insiders are cashing out at a rapid clip. And, at the dawn of new bull markets, there tends to be a lot of distrust on the part of retail investors. That definitely isn’t happening right now.

Phil Toews, chief executive officer of asset manager Toews Corp., agrees. He’s projecting that yields will continue to move higher, which will present a challenge for equity markets. Furthermore, valuations -- which by some measures have been topping the dot-com era -- tend to be the best predictor of market moves, he said.

“I wouldn’t give it two years -- I would give it maybe one year at the most,” he said. “Looking at the economy and saying the stock market is going to advance when we’re at these valuations may also be incorrect and we may see a divergence between the price of financial assets and the economy.”

©2021 Bloomberg L.P.

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