The global bull market in stocks remains alive and well — with likely and normal corrections along the way. Like many previous bull markets, this bull has risen beyond what most investors expected. In addition, like most bull markets, the bulk of investors have not participated in most of the market’s big run up. As we have mentioned in recent Strategy Updates, our research suggests that we are in the last third of the bull market — what we call the “7th inning.” Bull markets usually come to an end due to an outside influence. In the most recent decade it was the bursting of the internet bubble in 2001 and the collapse of the housing market in 2008 that effectively brought the bull to its knees with declines of 50% and 55% respectively during those periods. Though bursting bubbles can bring about bear markets, historically it is the Federal Reserve that usually brings the party to an end through faulty policy action. It is this risk that we see as the greatest threat to today’s global bull market.

The Federal Reserve and other international central banks have the power, through interest rate adjustments, to influence the business cycle and economic growth. By lowering interest rates, the Federal Reserve effectively fuels economic growth (as it did in 2009) lifting the global economy out of recession. Since that time, the Fed’s low rate policy has allowed economic growth to recover — albeit at a relatively slow pace. The current economic expansion has resulted in just 2% annual growth which pales by comparison to previous business cycles. Though interest rates have remained at historically low levels the economy has been unable to grow at a more normalized rate of 4%. This is concerning on a number of fronts, but is most concerning should the Federal Reserve reverse their low rate policy and start raising interest rates.

In recent Federal Reserve meetings, there has been much discussion of raising rates in 2015. These discussions have become so serious that some Fed governors have plotted a course and timeline for rate increases. Though we have great faith in the Federal Reserve, their track record is not good when it comes to when, and how much, to raise interest rates as the economic cycle matures. In fact, most significant recessions and stock market declines have been the result of the Federal Reserve too aggressively hiking rates — thereby choking off all economic growth. In this current period of slow economic growth the risk of a Fed policy error is quite significant. Therefore we will be following Federal Reserve policy very closely. It is our opinion that much of what we hear about potential rate hikes is all talk…and no action. Without a significant rise in global economic growth, central banks would be foolish to raise rates. Then again, their track record speaks for itself.

In the absence of Fed policy mistakes, our research suggests that the current bull market will continue for quite a bit more time. There is still a significant abundance of assets in bond and money market funds that does not signify that the bull market is near its end. In addition, stock prices relative to earnings remains reasonably priced at 16X — again not typical of the end of the line.

As we all know, our research and strategy can be de-railed by unforeseen events. Therefore, we continue to manage risk through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders, all of which are employed to mitigate the risk of catastrophic loss.

We hope this update finds you well. If there have been any changes in your financial circumstances or you would like to review your portfolio, please let us know. As always, we thank you for placing your confidence in our team.

Sincerely,

Your Team at Main Street Research