Where Are We In The Bull Market? | Jurrien Timmer

Episode Summary

Executive Summary: Urien Timmer argues this equity bull market is in its later innings but still intact, driven by resilient growth, easing financial conditions, and broadening market participation. He says higher long rates and positive stock-bond correlations are reshaping portfolio construction, while liquidity from QT ending, possible Treasury cash drawdowns, and ongoing fiscal expansion could support risk assets, gold, and Bitcoin.

Main Topics: Where we are in the bull market cycle (Priority: 5/5): Timmer places the market in about the seventh inning of both the cyclical bull market that began in October 2022 and the secular bull market that began in 2009. He says the advance is mature but still alive, with breadth improving after an initial MAG-7-led phase. Why this cycle is unusual (Priority: 5/5): He emphasizes that this bull market is the reverse of a normal post-recession cycle: it began with large-cap leaders rather than junk stocks, then broadened later. He ties the unusual pattern to the distortions created by the pandemic. Rates, liquidity, and the impact of QT (Priority: 5/5): Timmer argues that Fed tightening has been less damaging than expected because corporate and household balance sheets were term-locked, bank deposit costs stayed low, and QT was offset by reverse repo runoff and Treasury cash balance dynamics. Election outcomes and the 'Trump trade' (Priority: 4/5): He discusses how market pricing reflects expectations for a red sweep or divided government, both of which could support fiscal expansion. He notes that a Trump victory, especially with Republican control, has been associated with higher yields, a stronger dollar, and relative strength in small caps. Bear steepener, term premium, and risk assets (Priority: 5/5): Timmer says rising long-end yields reflect a higher term premium that should be near 50-100 bps in a fiscal-dominance era. He warns that bear steepeners pressure equity valuations through the Fed model and can trigger market wobbles even if earnings remain solid. Inflation, earnings, and valuation (Priority: 4/5): He argues inflation is back enough to affect valuation multiples, but as a nominal phenomenon it can also lift revenues and earnings. The net result may be decent nominal equity returns, but likely lower than the last decade because PE compression offsets some earnings growth. Portfolio construction beyond 60/40 (Priority: 4/5): Timmer says the classic 60/40 portfolio is no longer sufficient in a world of persistent inflation and positive stock-bond correlation. He suggests a broader 50-30-20 framework that includes gold, Bitcoin, cash, TIPS, and other diversifiers.

Key Arguments: This bull market is later-stage but still healthy because earnings are growing and market breadth is improving. The pandemic changed normal cycle behavior: leadership came first from mega caps, not from speculative small caps. Rate hikes were less effective than usual because mortgages and corporate debt were largely locked in at low fixed rates, and banks preserved strong net interest margins due to low deposit rates. QT had limited market impact because reverse repo balances and Treasury cash management offset much of the liquidity drain. A renewed liquidity wave may emerge if QT ends, the Fed keeps cutting, and the Treasury spends down its cash balance. The market is pricing a higher term premium because fiscal deficits remain large and fiscal dominance is becoming more plausible. Rising long yields force stocks to reprice; higher yields do not always mean falling stocks, but they do reduce the multiple investors are willing to pay. Inflation can lift nominal earnings, but markets are efficient and usually won’t grant high valuations for inflation-driven earnings growth. The best-case stock market regime is when earnings rise and valuations expand together; he thinks 2024 fits that pattern, but future returns will likely be more modest. Gold and Bitcoin are benefiting from falling real yields and rising global liquidity, making them key monetary hedges. Debt matters most when it forces fiscal dominance, bond-market repression, or currency weakness; the U.S. is not there yet, but the risk is rising.

Data Points: Cyclical bull market start: October 13, 2022 - Timmer dates the current cyclical bull market from the market bottom after 2022's bear market. Secular bull market start: March 2009 - He places the beginning of the secular bull market in the post-financial-crisis bottom. Current cyclical bull market progress: About 70% gains over 24-25 months - He compares current progress to historical median cycle gains. Historical median cyclical bull market: 90% gains over 30 months - Used as a benchmark for estimating current cycle maturity. 2022 S&P 500 bear market: 28% decline - He says the drawdown was valuation-driven, not earnings-driven. 2022 earnings growth: 8% - Earnings grew even as valuations compressed during the 2022 bear market. Fed tightening move: 0% to 5.375% - He cites the Fed's increase in short rates as the key driver of valuation compression. Quantitative tightening: $2 trillion balance sheet reduction - He argues QT had less effect than feared because other liquidity sources offset it. Reverse repo balance: About $200 billion - He notes the reverse repo facility has mostly been drained and may soon end as a QT offset. Treasury cash balance target: About $850 billion - He says the Treasury may again run down the TGA if fiscal conditions require it. Treasury cash balance cited: $830 billion - He references the Treasury's cash balance as a possible liquidity source if spent down. Current U.S. deficit: $1.8 trillion, 6-7% of GDP - He cites this as evidence that fiscal expansion remains large even in an expansion. U.S. debt service: $1.1 trillion - He highlights rising interest expense as a major fiscal pressure point. Dollar share of global reserves: 58% - He says the dollar remains dominant but has lost share over time. U.S. debt-to-GDP: About 255% - He references BIS-style total debt ratios for the U.S. across sectors. Target/neutral Fed rate estimate: 3.5% to 4% - He frames this as the likely neutral nominal policy rate given 2.5%-3% inflation. Inflation range cited: 2.5% to 3% - Used to argue the Fed is moving toward neutral rather than a true easing cycle. Real neutral rate assumption: About 1% - He uses this to derive his neutral nominal rate estimate. Term premium estimate: 50 to 100 bps - He argues long yields should be higher in a fiscal-dominance environment. Long-end yield scenario: Around 5% - His implied fair-value long-rate outcome if term premium normalizes. Magnitude of prior liquidity expansion: Gold and Bitcoin surged during 2020-2021; Bitcoin rose from $15,000 to $74,000 - He uses this to illustrate how falling real yields and rising money supply can boost monetary assets. Gold and Bitcoin behavior: New all-time highs / near all-time highs - He cites both as beneficiaries of current liquidity and real-yield dynamics. Market-cap valuation gap: Cap-weighted PE about 25 vs median PE about 19 - Shows how MAG-7 concentration inflates index-level valuation. MAG-7 weight: About one-third of the market - He notes index-level performance is heavily influenced by mega-cap leaders. Current unemployment rate: Low 4s - He says the labor market is back in balance rather than in recessionary distress. Labor market balance: One job for every available worker - He contrasts this with the post-COVID labor shortage and excess demand. JOLTS excess labor demand: From 3% of the labor force to zero - He argues this normalization happened without a major rise in claims. Forward curve expectations: About 3.5 rate cuts - He says markets have repriced Fed easing expectations downward from earlier in the year. Goldilocks valuation zone: 0% to 4% inflation - He says this range is the sweet spot for P/E multiples.

Pivotal Quotes: "I call this the seven and seven market, seventh inning of a cyclical bull market, seventh inning of a secular bull market." — Urien Timmer: His framing of where the market sits in the cycle. "This cycle has been the exact opposite of what we typically see." — Urien Timmer: He explains why the pandemic-era bull market does not resemble a normal post-recession advance. "We have to paint with a broader brush." — Urien Timmer: His conclusion on portfolio construction beyond a traditional 60/40 mix.

Implications: Investors should expect a less linear market with higher rates, more fiscal influence, and positive stock-bond correlation. Diversification may increasingly require gold, Bitcoin, TIPS, cash, and alternatives alongside equities and bonds.