The Gurus Are Wrong, This Bull Market Has Plenty of Fuel Through Summer

The gurus have been sounding the warning for months now, pounding the table about an imminent end to a now seven-year bull market. Bill Gross of Janus Capital is “sensing an ending,” Stan Druckenmiller is sounding the 2008 alarm, DoubleLine’s Jeff Gundlach is predicting the S&P 500 to crash to 1600, and Carl Icahn has revealed a net -149% short position still held in stocks and other securities.

They all will be right eventually, because no bull market lasts forever and a centralized banking and monetary system lends itself to booms and busts repeatedly. As things stand now, it doesn’t look like any major stock market decline will occur this year, at least not a decline that will break through February lows. Unexpected negative global developments such as a Brexit or another Greece-centered flare-up in the eurozone could arrest further advances in the bull market, but it is doubtful we will see a return to bear market conditions in 2016.

The reason is that the annual money supply decline that traditionally takes place in the last week of April has already happened, and this year it turned out to be quite mild. Combine that with lower stock prices now due to the oil collapse and subsequent liquidations of sovereign wealth funds earlier this year, and that means there is plenty of monetary fuel in the system to soak up any panic sell orders from nervous hedge fund managers.

Gross, Druckenmiller, Gundlach and Icahn like criticizing the Federal Reserve for its money printing and generally see interest rate hikes as bearish for the capital markets. The problem is that interest rate hikes are only bearish insofar as they slow down monetary growth. If we take a look at the latest Federal Reserve release, published May 12, on the state of the money supply and cross-reference it with bear markets in previous summers, it’s easy to see that there is no substantial slowdown this year so far, compared with other summer bear market years.

From a peak of $12.80 trillion on April 18, we are now at $12.66 trillion as of May 2, the latest reported dollar count. That’s a drop of 1.08% two weeks post peak. A drop like this happens nearly every single year at the same time of year, and 1.08% is the lowest drop in the past five years. Compared to last year for instance, money growth stopped on April 6 and the big drop occurred on April 27, for a huge 2.13% fall from peak to trough that month. That’s twice the percentage as this year, a lot of money printing to make up fast enough to avoid a crash. By Black Monday, August 24, it was too late.

The year 2008 by comparison saw a 1.95% drop from April peak to trough in money supply, still much more than the 1.08% we are seeing now.

It is still possible for this bull market to turn into a bear this summer if the numbers stubbornly refuse to recover by late August. After all, 2011 was also an exception in which we only saw a 1% drop from April peak to trough but still suffered an August crash, though that year was the only time the market saw a deep fall from such a small monetary decline going as far back as 1999, when the Money Stock Measures reports were first regularly published on the Fed’s website.

Considering that one exception and that the sovereign wealth funds of oil exporters will be buying more U.S. stocks as oil recovers, the chances of a bear starting or even a deep correction this year are remote.

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