American Stocks Shrug Off Coronavirus Storm: ‘We’re Obviously In a Bull Market’

'The path of least resistance leads higher,' argues financial analyst Nick Reece
February 24, 2020 Updated: February 24, 2020
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Wall Street braved headwinds from the coronavirus scare and weaker factory numbers last week, and while major indices ended up dented, a few hit record highs, suggesting American equities still have steam.

The S&P 500 and the Nasdaq both hit new bull market highs on Wednesday, but on Friday the former finished the week over 1 percent in the red, while the latter suffered its biggest drawdown in some three weeks.

Gold, a classic safe haven in times of chaos, hit a seven-year high last week, while the yield on the 30-year U.S. Treasury bond slid to an all-time low, suggesting some safe-haven reallocation was in play.

Still, American stock markets remain on solid footing, argued Nick Reece, senior financial analyst and portfolio manager at Merk Investments, speaking to The Epoch Times about a U.S. equity market report (pdf) that tracks a range of economic indicators to try and determine if the market top is in and whether the wave is about to roll over.

“We’re obviously in a bull market,” he said in a phone interview. “There’s so much negativity and pessimism out there, and so much bearishness, it’s always a question of, ‘Well, is it over?'”

“And a lot of people are always trying to say, ‘It’s a major market top, there’s a recession around the corner.’ You hear a lot of that.” But the data, Reece argued, says otherwise.

“I think the bull market is likely to continue until further notice,” he said, adding that “the path of least resistance leads higher.”

The report’s unit of analysis is the S&P 500, a stock market index that tracks the stocks of 500 large-cap U.S. companies and is a key measure of U.S. equity market health. The diagnosis, according to multiple indicators, is that stocks are likely in for even more all-time highs.

“There are some indicators that I would be looking for before the end of this bull market, and we have not seen those indicators yet,” Reece said.

Market Breadth

One indicator the report tracks is market breadth, essentially a measure of how many stocks do the heavy lifting when the market is propelled to new all-time highs. If only a few high-performing stocks drive the needle, the breadth measure scores low.

One of these gauges reflects the percentage of S&P 500 member stocks trading above their 200-day moving averages. It recently hit 80 percent—substantially above its 65-percent warning line—which is “historically inconsistent with a major market top,” Reece said.

“It’s a positive sign for the bull market,” he added.

Epoch Times Photo
A chart depicting market depth, tracking the percent of S&P 500 member stocks above their 200-day moving averages when the S&P 500 makes a new bull market high. (Courtesy of Nick Reece, Merk Investments)

A chief objection to the bull market case is record-high valuations, an indicator that Reece acknowledged was flagging some long-term risk.

He said he was “cautious” on the one-to-five-year perspective due to some signals of relatively low expected returns on average over the next 10 years, but added that no single indicator should be interpreted in isolation. Also, the entire forecasting exercise is “a rolling window and a Bayesian process,” he added, referring to a technique of statistical inference that updates probabilities as new data becomes known.

Epoch Times Photo
A checklist of economic indicators used in the Merk Investments U.S. Equity Market Report. (Courtesy of Nick Reece, Merk Investments)

“The permabears are apoplectic,” Reece said of experts long-predicting a near-imminent market meltdown, as the bull market has continued to break through new all-time highs.

“What if the next recession is relatively mild and without a bear market (like in 1990-91)? What if this is a secular bull market that can rise another 4x without a major bear market?” he said.

“I think those are non-consensus ideas worth considering,” he added.

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