We have been asked from time to time about the age of this ongoing bull market and what would have to change to become neutral or even bearish equity prices? This is a great question. Ever since this epic bull market started in 1981, equity prices tend to rise for about 8 years plus or minus and selloff for a year or two. This has gone on for so long that investors now expect inflating equity prices. This is why ETFs built on indexes, subindexes and sectors are all the rage. Investors have put aside stock picking and simply "buy the market" or "the oil sector" or the "technology" sectors, etc. to get exposure and let inflation do the rest. Now that about 8 years have passed, what might we look for to tell us that a correction or bear market lies ahead?
This question comes up because prices have rallied aggressively ever since the election. We believe that lower corporate tax rates will take equity prices higher as after-tax earnings will jump in 2018 even if revenues and pre-tax earnings stagnate. It is important to recognize that lower tax rates will have a one time benefit to earnings per share. The economy needs to expand for earnings to continue to grow and take share prices even higher.