One word characterizes why the bull market can go on for years

Sam Ro
Managing Editor
Goldilocks and the Three Bears as seen on the Baildon Scarecrow Walk. (Flickr / Tim Green)

Economists often use the term “Goldilocks” to describe an economy that’s not too hot and not too cold.

More and more stock market strategists have taken this characterization of the economy to justify why they think the stock market can continue going higher for years to come.

“The global bull market continues almost unabated, with a solid earnings season and a ‘Goldilocks’ U.S. economy helping to fuel gains,” Charles Schwab strategists Liz Ann Sonders, Brad Sorensen and Jeffrey Kleintop wrote on Friday. “The risk of a pullback has risen, which in our view would be healthy, as it could help prevent a melt-up and keep investor sentiment in check. For now, we believe the trend will continue upward, with some potential bumps along the way.”

“Goldilocks” describes an economy in which conditions are just right. They’re not so cold that we have a high risk of falling into recession. Meanwhile, they’re not so hot that economic boom quickly turns to economic bust. Sure, U.S. economic growth has been less than spectacular. But it has nevertheless been growing, and most economists don’t see that growth turning any time soon.

Low inflation makes it “better than Goldilocks”

Typically, economic growth begets a pickup in inflation. And when economic growth and inflation heat up, central banks step in to tighten monetary policy in their efforts to keep price stability in check. But aggressive tightening risks throwing the economy into recession.

However, inflation has been remarkably subdued, leaving many economists bewildered as they scramble for explanations for why a growing economy with low unemployment isn’t seeing rising prices. Regardless of the explanation, low inflation gives the Federal Reserve the room to keep monetary policy loose and stimulative, which is arguably bullish for stocks.

The market “is not yet worried about inflation or central banks spoiling the party,” JPMorgan’s Jan Loeys said on Friday. “We nicknamed this world ‘Better than Goldilocks’ two weeks ago.”

In that earlier commentary, Loeys said: “With global growth breaking out from its 7-year range and inflation still surprisingly down, we are graduating from a not-too-hot, not-too-cold Goldilocks world to an even better one for risk assets. It will not last forever, but could easily last long enough, given past momentum in growth and inflation forecasts changes, to have a positive impact on all assets with risky ones outperforming.”

“The bull market could continue forever”

Strategists believe these conditions are optimal for the bull market in stocks, which is already eight years old.

“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among business and consumers,” Leuthold Group’s Jim Paulsen said to CNBC on Friday. “The kick is we can do all of this without aggravating inflation and interest rates. If that’s going to continue, I think the bull market could continue to forever.”

It’s worth noting that most of these strategists aren’t necessarily forecasting spectacular double-digit returns for the stock market. Rather, they’re mostly saying that the risk of a big bear market remains low.

It’s also worth noting that bull markets often end when the economy goes into recession, not when it stays in prolonged periods of low growth.

“Strong global growth and low inflation equals a Goldilocks environment for equities,” Bank of America Merrill Lynch’s Ajay Kapur said in a research note titled “Hello Goldilocks!”

Sam Ro is managing editor at Yahoo Finance.
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