Why the longest bull run will also be the strongest

The run in U.S. stock prices over the last nine-and-a-half years is the longest—and may soon be the strongest, thanks to fundamental market drivers, says BMO senior economist Robert Kavcic in a weekly financial digest.

Read: Investing tips as bull market becomes longest in history

For example, monetary policy response to the Great Recession has been historic, says Kavic, and “just as important for stocks, the move to normalization has been exceptionally cautious.” Monetary policy is expected to remain supportive, as longer-run neutral policy rates are still a year or so away, he says.

Also, corporate sector resilience has been an “underappreciated source of longevity” for the bull market, he says, with no compression seen yet in profits.

“Well-contained growth in unit labour costs is certainly helping,” says Kavcic, “and the Q2 reporting period suggests that there’s no sign of a negative turn on the corporate front at this point.”

U.S. corporate tax cuts added fuel to the bull market. “In fact, the wave of fiscal stimulus out of Washington comes at a time when the economy least needs it—and thus it comes with maximum bullish effect,” says Kavcic. Peak growth is likely mostly priced in to the market by now, he adds.

He also notes that tech stocks have been a key narrative of the bull run. “While we’re not seeing 1990s-like exuberance, the emergence of new technology leadership has certainly helped,” he says, noting that the S&P 500 has tripled off 2009 lows, while the Nasdaq has risen more than sixfold.

Referring to quarterly earnings reporting, CIBC economists note in a weekly economics report that earnings outperformance is more likely in certain sectors, including tech.

“With roughly 80% of companies posting positive earnings surprises since 2013, information technology and healthcare firms have easily outshined those in other sectors on that metric,” says the CIBC report.

The same trend played out again in the first half of 2018.

“IT and healthcare have on average seen more than 90% of companies outperform expectations in 2018, versus 77% for the S&P 500 as a whole,” says the CIBC report. “Given the consistency over time, a short-term strategy that focuses on earnings surprises would likely benefit from overweighting those two sectors.”

Read: Investing tips as bull market becomes longest in history

Where were you when the market crashed?

In a market review, GLC Asset Management asks its portfolio managers, traders and analysts what they most remember from the 2008-09 financial crisis and recovery.

Nancy Harris, senior vice-president of marketing and business development at GLC AM, says she remembers the crash because she was giving a presentation to financial advisors. One advisor commented to her that the crash was irreversible and would only go down.

“That was the moment I started to believe we were close to the bottom,” she says in the report. “When people expect only the very worst, any sign of something better can spark a turnaround.”

Read: Record bull run? Time to help clients prepare for the worst

Rob Lee, vice-president of equities at GLC AM, says in the report that the crash taught him the value of risk management and due diligence. “I think just as much about avoiding ‘losing/bad’ stocks and preserving capital as I do about finding the next great stock pick,” he says.

Read: Why buy-and-hold investors should be cautious late cycle

Brandon Hutchison, assistant vice-president of portfolio solutions at GLC AM, says recent market stability stands out to him, and that active managers will benefit as the pendulum swings away from passive management.

As interest rates rise and markets turn, “active managers will be sought out for strong security selection that can mitigate volatility and preserve capital for longer-term wealth,” he says in the report.

Read the full reports from BMO, CIBC and GLC Asset Management.