Zeller Kern’s Investment Monitor

Are We Still in a Bull Market or Have We Ended One?

March 4, 2019

By Steve Zeller                           

The market has roared back from its lows in December, and erased the declines since the mid-October time period. As our readers may recall, we were mentioning, back in October/November time frame, that the data sets that we follow were indicating the economy entered into a new cycle during the fourth quarter – A cycle of slowing growth, slowing earnings, and slowing inflation. In fact, we were suggesting that the 4th quarter GDP figures would come in between 1.50% – 1.70%, annualized, versus the Atlanta Feds tracking of 2.5% GDP growth. But currently for Q1 of 2019, the Atlanta Fed GDPNow tracker has crashed down to 1.4%, a little over a week ago, and as of March 1st, the GDP Now estimate is at .3%! So, the economy is slowing worse than we expected, and the Fed has made an “about face” on its posturing with short term interest rates. Two months ago, they were debating how fast to keep raising rates.

Atlanta Fed GDP Now Forecast as of February 21st



Atlanta Fed GDP Now Forecast as of March 1st


Back in December, when the market was crashing, the Federal Reserve Chairman went from a “hawkish” position on interest rates, to a sudden turn to being dovish, which has helped the market come roaring back.

In our last few issues of the “Investment Monitor”, we stated that we had entered into this slowing cycle. Wall Street now appears to realize this and they are begging our Federal Reserve to reduce short term rates along with “hyping and hoping” that President Trump comes through with a trade deal with China, and the latest news is that Trump and Xi may come to some sort of agreement by the end of the month. It appears that the market is pricing this in, big time. Furthermore, there continues to be an insane level of share buy-backs, so far, this quarter, and we have had a tremendous rebound in stock prices, as a result. This is a rebound against a backdrop of bad news of significant slowing of revenue growth and slowing earnings growth. If the market continues to rally to its previous all-time highs, where would it put its valuation?

 S&P500 Index from 1/1/2018 – 2/23/2019

S&P 500 - 2018 Chart


But the market has roared back, how could that be a bear market? Markets often rebound in bear markets, after significant periods of decline, and those rebounds can be vicious. That being said, the recent market behavior is an extremely difficult situation to deal with if you are trying to manage risk. On one hand, you have an economy that is clearly slowing, and is historically proven to be a bad omen for the stock market. We’ve already seen the market get battered in Q4 of 2018, because of it. On the other hand, the market just abruptly recovered and broke through key resistance levels, which could arguably lead it to achieve new highs.

Which trend will come to fruition? Honestly, it is very difficult to determine, at this point. A well-seasoned colleague of ours, recently commented that “you would think that in the 40 years of being involved in the markets as a trader, analyst, and consultant, that I would have seen just about everything you can imagine.” He was commenting that after all major technical indicators point to a developing bear market, it now appears to be setting itself up to enter into new highs. Keep in mind, it is against the current data…. Which is pointing to a slowing of the economy.

To add to the challenges, wages and employment costs are rising, and we are at record low unemployment. But, if we have declining earnings and revenue with rising labor costs, what happens? Profits get squeezed even more. This is not good for stock prices. Also, this is against a backdrop of  record level corporate debt of approximately $4 trillion, with a record level of junk debt.

Perhaps President Trump has, once again, been under estimated, and a new trade deal will emerge, the economy will come roaring back, and the stock market will head to new highs. Perhaps the current state of the economy is not a declining cycle, but rather a blip, caused by a trade war.

Either way, the market is in a recovered position, and is either gaining strength for an extended upward trend, or it is in a bouncing phase within a developing bear market, we’ll just have to see.

For investors that have chosen a stay invested approach, we want to remind you that not only should you prepare for tough periods staying invested, your risk appetite needs to be suitable to sustain the storm, no matter how bad things can get, and that you are willing to accept the results.

What’s Up with The Fed?

There are arguably two schools of thought out there about the future actions of the Fed: One view is that the Fed very much wants to unload most of the assets that it currently holds on its balance sheet, which recently looks to be around $3.9 Trillion, down from approximately $4.5 Trillion – And it should be noted that they have made a pretty decent attempt to do so over the last two years. This school of thought also is suggesting that the Fed will continue to raise rates through to the end of 2019.

The Federal Reserve’s Balance Sheet - Source: St. Louis Federal Reserve


The other view is that the Fed will panic and move to prop up the stock market, if or when it begins to rollover again, by reducing short term rates and attempt to give Wall Street what it is begging for. But, they will most likely be late for the party, as they usually are. Unless this is just a trade war aberration, it is becoming pretty apparent that we are indeed in a cycle where growth, inflation, and earnings are slowing. Q4 earnings are almost completed in reporting, and the rate of change is way down from Q3. What makes it even more challenging going into Q1, Q2, and Q3 of 2019, is that those same quarters in 2018, were record quarters for profit growth. A rapid decline in the rate of growth going into these “comps” could get quite ugly.

Currently, it appears that the Fed will slow interest rate increases and still attempt to reduce its balance sheet. Let’s see if they will stay the course.

Share Buy-Backs – A major back stop for the market
Speaking of share buy-backs, publicly traded corporations are on track to shatter their buy-backs during Q1 of 2018, which was an all-time record. In a recent article published on CNBC.com, share buy-backs are on their way to another record this year, potentially topping the $1 trillion record that was achieved in 2018. 


Bank of America Merrill Lynch estimates repurchases are up 91 percent, year-over-year, with staples and materials leading the way, followed by tech companies, and financials. According to the article, the past week saw nearly $2.8 billion, which is the fourth highest level since BofAML began tracking the data point in 2009.

This week will wind down the earning season as are likely to see about 500 releases this week. Earlier this week, estimates have been reported that the average earnings growth for the S&P 500, so far, was approximately 11% versus a prior quarter of approximately 23%. That’s a substantial drop. Economic reports coming out this week focused on housing and manufacturing.  These reports are likely to have the most impact on the market sentiment this week.

Best Wishes,

Zeller Kern Investment Committee