Wednesday, July 9, 2014

Yardeni: Bull market entering its final (euphoric) phase [prediction]

The strategist writes that the last of four phases for the S&P 500, the "melt-up," probably began in May.
  • Editor's Note: Yardeni is president and chief investment strategist of Yardeni Research, a provider of independent strategy and economics research.
  • Below from Barron's 9 July 2014
In 1725, Antonio Vivaldi composed "The Four Seasons," a set of four violin concertos. The sounds of each concerto resembles its respective season. So for example, "Winter" is punctuated with pizzicato notes from the high strings, suggesting icy rain. "Summer" sounds like a thunderstorm in its final movement, which is often called "Storm."

One of the great virtuosos of the investment business was Sir John Templeton. He observed that bull markets experience four phases: pessimism, skepticism, optimism, and euphoria. Similarly, my friend Laszlo Birinyi has also identified four phases: reluctance, digestion, acceptance, and exuberance.

Where are we now in the current bull market? In my opinion, we are moving from the third to the fourth phase for the S&P 500. The first phase started on March 9, 2009 and ended after the second and worst correction of the bull market, on October 3, 2011. The second phase included three minor corrections, with the last one ending on June 1, 2012.

The third phase has had no corrections and is probably coming to an end now. It may be setting the stage for what can also be called the "melt-up" phase. The start of the fourth phase probably coincided with the bottom in the "internal correction" of the momentum stocks on May 8.

Adding to last week's lovefest for stocks was June's employment report. It was a strong one, which should have raised concerns that the Fed might have to start raising interest rates sooner rather than later. Indeed, the 10-year US Treasury bond yield has risen from the year's low of 2.44% on May 28 to 2.65% on Thursday. That's a relatively tame reaction given that the unemployment rate is down to 6.1%, the lowest since September 2008.



However, wage inflation remains subdued at 2.0% despite the drop in the jobless rate. Since she became Fed chair earlier this year, Yellen has stated that she wants to see wage inflation rise to between 3%-4% before she'll be happy with the performance of the labor market. Of course, this is just one of the labor market indicators on Yellen's "dashboard." Some of the others show that the labor market is improving, but she is clearly giving more weight to wages. Let's review:

(1) The U-6 unemployment rate fell from 12.2% during May to 12.1% during June, the lowest since October 2008. (Editor's Note: The Bureau of Labor Statistics defines the U-6 rate as total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.)

(2) The long-term unemployment rate fell to 2.0% last month, the lowest since February 2009.

(3) The long-term unemployment as a percentage of total unemployment fell to 32.8% during June, the lowest since June 2009.

There were plenty of other upbeat employment indicators. Most importantly, our Earned Income Proxy (i.e., aggregate hours worked times average hourly earnings) rose 0.5% last month to another record high. It is highly correlated with both private wages and salaries in personal income and with retail sales.

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