We’ve said repeatedly that we believe the current bull market will continue until there is either a recession or a restrictive monetary policy.

So far, that position has been accurate as the S&P 500 recently hit a new all-time high and the length of this bull market, according to some, has become the longest on record, beating the previous bull market that took place between October 11, 1990 and March 24, 2000. However, there are those who say the market decline in the 3rd quarter of 1990 was actually a correction. If they are right, then the bull market of the 1990’s actually started on December 4, 1987. That extended bull market lasted 4494 days compared to about 3500 for our current run. That might lend some comfort to those trying to handicap how far we are into this cycle. Furthermore, the current economic expansion supports the market as it will become the longest expansion on record in July, 2019.

Since the January high and subsequent 10% correction, the market has been in a relatively narrow trading range for roughly five months. However, earnings estimates continue to improve and the economy is reasonably strong. So, why the hesitation? In my opinion, it has to do with having a clear view of the future and what is fogging our lenses is the Federal Reserve policy and foreign trade negotiations. Markets don’t like uncertainty and until we get some resolution to these issues, especially the trade impasse, the market isn’t likely to make much headway.

Believe in the Easter Bunny? Then maybe you’re an April fool. Believe in foxes, as in “Crazy like One”? Then maybe Trump’s tariff strategy isn’t that bad. OK, my apologies to the foxes.

Nonetheless, tariffs and trade seem to be the latest issue to afflict this market which came shortly after an inflation scare in the form of a higher than expected January wage increase which sent the market to its first correction of over 5% in more than a year.

Although they may seem like uncorrelated issues, they are not. Both factors have an impact on profit margins. But I’ll come back to this shortly because it is the essence of the bear case for this market.
In the meantime, I wonder if this market is like the proverbial bug in search of a windshield; it is looking for a reason to correct and these are the most convenient excuses. Earlier, many thought the market was overvalued and should correct. But, with tax cuts and synchronized global growth, valuations have come back into the reasonable zone.

There’s an old adage on Wall Street that says, “Buy the rumor, sell the news.” It’s a simple synthesis of how the market operates in that it reacts to expectation or forecasts, it doesn’t wait for them to be announced. And when there is an announcement, it’s often too late for an investor to take advantage of it because it’s already priced into the market. And for a trader, it’s time to sell.

We saw a good example of “buying the rumor” late last year as it became more apparent that tax reform legislation would be passed in the United States. When it was signed into law on December 22nd, that was the news. Time to sell? Well, we think not. In this case, tax reform is broadly considered positive, but the real impact will be company and industry specific. So, we think the “news” will be revealed in the fourth quarter earnings reports which will start in mid-January.

Although tragic, the nice thing about hurricanes Henry and Irma is that they took President Trump off the front page, temporarily.

Nonetheless, politics on both sides of the border have had an influence on the market. We shouldn’t forget we have our own tax drama going on here at home with Mr. Morneau’s proposed tax changes.

I’ll address the Trump effect, but first let me give you my conclusion.

Bottom line, I’m still positive on the stock market. The economy is growing as are earnings while the U.S. Federal Reserve maintains a modestly accommodative monetary policy. I don’t anticipate this stance changing until we get either the threat of a recession or much tighter monetary policy. The only concern I have is with valuation. The stock market isn’t cheap. Other forecasters however, have conflicting opinions about the market, but the reality is that the stock market is at an all-time high despite greatly reduced expectations about the Trump administration’s economic agenda.

It doesn’t seem that you can have a conversation about the market without it becoming immediately dominated by a discussion on President Trump.

I must admit I like many of his policies. If effected, they could do wonders for the economy and the stock market, and I’ll get to that momentarily.

However, his deportment as the leader of the world’s most powerful country does leave something to be desired. But, out of respect for his office, I thought I might raise the bar and take the lead from one of the world’s truly great leaders, Winston Churchill. He was always good at a little misdirection when talking about someone else and used paraprosdokians to make his point.
These are figures of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. As I said, Winston Churchill loved them and I thought I might recount a few that he might use today

The best place to start this quarterly is probably where we left off with our year-end comments.
The market’s focus remains on President Trump and what he can accomplish. At year-end, we made two points.

First, there were a lot of things that had already changed in the market before Trump’s election such as the following:
1. Interest rates had bottomed;
2. The economy was improving;
3. U.S. fiscal policy had turned from austerity to stimulus;
4. Inflation was showing signs of picking up.

Second, his platform not only accentuated these trends but added two more.
1. Plans for deregulation;
2. A dose of optimism.

It seems as though the Christmas season kicked off with the US Presidential election instead of the traditional U.S. Thanksgiving weekend. Is this market for real or is everyone on a sugar plum high and way ahead of themselves? I won’t keep you in suspense; I think we’re at an inflection point provided President-elect Trump can deliver. But let’s not give him all the credit. There were a lot of positive things going on in the market before he got elected. His victory was simply a shot of adrenalin that amplified their impact.

So, it might be helpful to review the foundation underlying this market before we layer on the Trump effect.

The reality is that the market started to change its complexion last spring. That change was set back by the Brexit vote but reasserted itself in July, resulting in a pretty good third quarter. The November election just amplified those changes.

I refer to them as inflection or changes in direction for some of the major “macro” factors influencing the market.

For some reason, the day after Labour Day always feels like the start of a new business year. People are back from holidays, cottages are being closed and it’s time to get refocused on business.

If you were distracted by all the good weather, the market actually had a pretty good summer after getting a little jolt from Britain’s decision to leave the European Union.

Consequently, we thought we might try to pull it all together for you. We’ll start with the general consensus on the market, then give you our views and finish by trying to elaborate on the bull and bear cases for equities. Along the way, we’ll work in some comments on the Federal Reserve’s interest rate policy and the upcoming U.S. Presidential election and other popular concerns.

After Britain’s vote to leave the European Union on June 24th, opinions about the future ranged from this being as significant as the 2008 financial crisis to nothing is going to happen for the next two years.

We’ll concede that it was a significant event, but having observed how Europe has handled several crises in the last few years, we tend to agree with Ned David Research that summarized it by saying,

“Brexit will be dealt with in typical European fashion: with a compromise that changes nothing,
satisfies no one and kicks the can down the road.”

That said, the event has called into question a number of factors that are influencing the market from Central Bank policy to economic growth. So it’s probably worth spending a little time sorting out what is fact and what we can and what we cannot expect going forward.