Economic Indicators are Consistent with a Still Immature Expansion Cycle

Wide output gaps testify to US, European and other major economies still functioning well below their potential levels and cyclical highs in economies and equity markets do not come until after the output gap closes.

David Fuller's view I think this is an extremely helpful, objective report, and not just over the medium term as most of these indicators will remain relevant in terms of bull and bear market cycles.

An unnerving aspect of the current environment is that in terms of monetary policy, it has little relevant precedent. However, the biggest risk to bull markets, in my opinion, is death due to persistent monetary tightening by central banks, usually in their efforts to quell rising inflationary pressures.

Additionally, one also expects an obvious bull market mentality near market tops of significance, characterised by overconfidence, soaring leverage, stretched valuations and other excesses.

Arguably, neither of these conditions exists despite gains seen since the 2008-2009 lows, albeit from extremely oversold conditions during a credit crisis. Therefore, the bull market is unlikely to be over, although it may be sidetracked for a number of months for reasons that Eoin and I have discussed in recent weeks, including overstretched uptrends by the leaders.

However, there is an outside risk, although unlikely in my opinion - deflation. The bear case is that disinflationary / deflationary pressures could take hold to such an extent that stock markets are dragged lower in a cycle of declining output, sales and corporate profits.

Meanwhile, the frequently discussed Fullermoney view is that stock markets are now ranging in a somewhat choppy fashion, which could last for at least several months, before the bull market cycle resumes.