What does a bear look like?
In today's stock market, it's become somewhat hard to say. Most experts agree that the bulls still have some juice in them, but that a turnaround is inevitable.
But as stocks continue to lack much stability, has the time come to ring the alarm? Not just yet, according to Jeff Kleintop, chief global investment strategist for Charles Schwab Corp. (SCHW) .
Kleintop explained that the market has endured pullbacks of similar magnitude and duration as the current pullback three times during this economic cycle -- each of which came after the end of a period of quantitative easing.
Those pullbacks appeared following a period of "extraordinary" monetary stimulus, Kleintop said, that left the stock market on what Schwab refers to as a "sugar high" in its mid-year outlook released this week. During this particular pullback, stocks were coming off a double sugar high, as that extraordinary monetary stimulus has been paired with extraordinary fiscal stimulus in the form of tax cuts enacted late last year.
The fall from December and January highs, then, isn't necessarily the beginning of the end for the bull market. Instead, it is stocks rebalancing with the reality of the economy.
"The good news is that they're nearly back [to reality]," Kleintop said. "The bad news is that they're pointing to maybe single-digit returns over the next 12 months as opposed to the double-digit returns we might have enjoyed over the last year or two."
The S&P 500
"Through the volatility, and I think volatility is going to remain high, I think the bias is to the upside, barring a major trade war," Kleintop continued. "If we can take that out of the picture, steady earnings growth I think can continue to lift stocks. But maybe at more of a single-digit annualized pace."
When the Other Shoe Drops
So what will the market look like when that upside turns to a downside? According to Kleintop, "It will be a fairly traditional, cyclical bear market once it takes route."
"While we've seen drops maybe from 20% to 50% in the past, this one will be more of a garden variety recession. No big bubble associated with it," Kleintop said. "But that's still probably a year or so away. I think we're still in the melt up before that meltdown."
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The melt-up is typically associated with euphoria, the sentiment on which the legendary Sir John Templeton said bull markets die. Kleintop said this market hasn't reached that phase just yet, despite sky-high sentiment in late 2017.
"People are a little bit more pessimistic, a little more cautious than they were. Cash balances have crept back up a little bit after getting really low. Still, they're on balance a little more optimistic than they have been in the last eight or nine years and that does suggest we're closer to the end of this cycle than we are the beginning. But we're certainly not at the levels of euphoria either in valuations or in individual investor sentiment that we've seen in the past," he said.
Kleintop explained that sentiment is only half of the equation -- it must be taken into account simultaneously with action. Right now, investors are putting more money to work, but that action comes after several years of selling equities, he said.
"It's not like we're nine years into buying, buying, buying -- that really only turned around in the last year or year and a half," Kleintop said. "Maybe the duration of this cycle is long, but the temperature still has a little bit to go."
The Global Economy Is Steady
Global profit growth has been slightly slower recently than it was earlier in this cycle, but the overall picture remains positive.
"There's 189 global economies. Right now 185 of them are growing," Kleintop noted. "We've seen faster growth globally but we've never seen broader growth, and that creates a resiliency."
Kleintop likened the global market to the old economic adage of a three-legged stool. If you take one leg away, the whole thing topples over. But in this day, that metaphorical stool has "185 legs," he said. That makes for one very strong and very stable global economy.
While a global trade war "would be like a chainsaw and just take them all out from under that chair," no single country's shortcomings would push the entire global system off the edge. Not even Argentina's or Turkey's economic turmoil or even Brexit could implode the system as the doomsday preppers fear.
"They're just not big enough," Kleintop said. "By themselves they're just not big enough to topple that chair over."