Will the stock market boom go bust or at least slow — and if so, when and why?
Not for at least another 12 months — and perhaps not until sometime after 2019 — and then most likely only due to "natural" causes, said speakers at the opening Tuesday night keynote at the Charles Schwab IMPACT 2017 conference in Chicago.
"Stocks have been rooted in better fundamentals of growth around the world," Jeffrey Kleintop, chief global strategist and senior vice president at Schwab, told many of those of the 4,000 registered investment advisors in town for IMPACT, who had gathered in a cavernous hall at the McCormick Place conference center for the presentation.
"That's been true through the Brexit vote, through the U.S. election, through the shift in central bank policies — even the North Korea risks. Stocks have remained anchored in better growth prospects," he added, with every one of the top 45 largest world economies — including the U.S. — recording positive growth in 2017, according to the OECD.
More of the same is said to be on tap for 2018. "That is a fantastic environment for investors," Kleintop said.
The current pace of growth, the best and broadest in 10 years, "is lifting earnings, with little sign [and] little risk of recession or a bear market or bubble-bursting in the next 12 months," Kleintop said, also noting that the yield curve — the difference between short- and long-term interest rates and, historically, a good predictor of a coming recession — seems to indicate the all-clear for at least another two to three years.
Liz Ann Sonders, chief investment strategist and senior vice president at Schwab, agreed. The yield curve, she said, indicates "very minimal lift at this stage in the risk of recession, and I think we really probably don't have to really worry about that until about 2019 or so."
Good news for sure, but optimism can eventually morph into investor euphoria. And Sonders reminded attendees that the American-born British investor and fund manager Sir John Templeton once famously quipped that, in the end, bull markets die on euphoria.
"We all know this has been a unique bull market, so I have my own take on this: That this bull market was born on despair, grew on disbelief, has matured on skepticism and may die on acceptance," Sonders said, referring to the somewhat tempered (historically speaking) optimism typical of today's investor.
Thus, all this good feeling could indicate a slowly approaching end to current good times, since markets historically cycle through periods of expansion, accompanied by increasing optimism; peaks, with their euphoria; recession, troughs, recovery and then expansion again.
Sonders thinks the U.S. economy and markets are in the latter stages, still in expansion mode but approaching a peak, based on metrics such as corporate earnings and the ISM manufacturing index; the Economic Surprise Index, which measures how economic data comes in relative to expectations; and business capital spending.
The latter "will continue to be a pretty bright story for 2018," she added. "It's late-cycle but it's very positive in terms of overall economic growth … and earnings growth … and that should lead to a pickup in productivity."
As a market indicator, productivity historically trails the market so, as it is just starting to lift up, "this means we've still got some runway for the market to continue to do well."
For all the apparent uptick in investor optimism about the economy and markets — and the implications for the boom-and-bust cycle — Sonders said there is one factor that may indeed be acting as a brake on euphoria and, therefore, an imminent threat of a crash: a hangover from the Great Recession.
"Not a single dollar of net new money has come into the U.S. stock market since before the financial crisis [and] that is unheard of in a bull market that is approaching its nine-year birthday," she said. "It tells me the 'wall of worry' is still intact, that maybe we don't follow the same cycles we have in the past.
"Maybe my take on the Templeton quote is valid in that we ultimately don't get to peak euphoria in this bull market," Sonders added. "One of the reasons we've had this increased skepticism and suppression of optimism has been the muscle memory of the financial crisis but arguably also because of dysfunction in Washington. I think that's been a weight on sentiment."
What investors probably don't have to worry about, said Sonders and Kleintop, is a catastrophic burst bubble on the order of the dot.com or subprime mortgage fiascos. Very few of today's so-called bubble markets — bitcoin and other crypto-currencies being a prime example — "represent something systemic [that] adversely takes out the entire global financial system, like what happened in 2007," said Sonders.
"I do think it could exacerbate what might otherwise be a relatively shallow pullback in the market, maybe not to flash-crash proportion but ... I think it's a risk we need to be mindful of this as we think about portfolios," she said.