Is the SPX in a secular bull market?

Yesterday's core PCE deflator was slightly weaker than expected, but only by the smallest of margins.   The monthly change was 0.1494%, this close to being rounded up to 0.2%; the y/y change remained (a low) 1.7%, but nevertheless printed its highest unrounded level in more than three years.  While the short end caught a small bid, the rest of the market was suitably unenthused in what was generally a very quiet day of trading.  Will Janet Yellen be similarly phlegmatic?   We'll know come her speech at 11.30 NY time this morning.

There was an interesting discussion in yesterday's comments section about whether equities, or at least the S&P 500, are in a secular bull market.  Macro Man's answer is that "it depends".   If one acknowledges only two world views, secular bull and secular bear, then Macro Man would acknowledge that we are probably in a secular bull, albeit likely at the tail end of it.   If, however, one is to countenance a third state of existence, a transition phase of extended range trading where neither bull nor bear arguments hold sway, then Macro Man would place his chips on that spot of the table.

While the sideways price action in neither the SPX nor earnings over the past eighteen months is unprecedented, by the same token neither offer a compelling argument that this remains a secular bull market for the SPX.  While the retrenchment in earnings does have precedent, it is generally rare outside of recessions/bear markets; in the modern financial era steady rises in equities have typically been accompanied by steady rises in earnings.  That the latter have foundered even as the denominator in EPS has shrunk courtesy of buybacks would suggest a darker than normal story for gross earnings.  Again, this is hardly a sign of robust underlying strength.

One measure that Macro Man likes to look at is the 2 year change in both price and earnings.  As the chart below illustrates, the two measures generally track quite nicely and provide some corroboration (or warning sign, as was the case in the late 90's) of underlying trends.  As you can see, the two year change in both price and earnings are both barely positive; the only two times that they were both negative over the last thirty years were the bear markets in the early and latter portions of the last decade.  It is for this reason that Macro Man said that if forced to choose between bull and bear, he would stick with bull....but a tired one on its last legs.

Ultimately, the whole notion of "secular bull" and "secular bear" may not be that useful.   To be sure, if you're a pension allocator with a two to five year time horizon, it is an important distinction...and the chart above might suggest lightening up on equity positions (which, to be fair, it seems that many pensions have been doing.)  For most others, however, the cyclical oscillations within secular market directions provide ample opportunity to generate some decent P/L.

As things stand, in any case, Macro Man plumps for the "sideways" third option, which entails buying weakness and selling strength, and assuming that nothing will carry on forever.

Continuing on with the CTA proxy model project, Macro Man rigged it up for a number of dollar-cross exchange rates.  Readers will probably be unsurprised to see that the proxy models are short dollars in every single one of them....except cable.

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