Quarterly Commentary

1. NEW: Recessions By Decade: Record on the Horizon. The current expansion, which started in June 2009, is now the third longest in recorded history since the 1850s. If it lasts until May 2018, the current expansion will become the second longest and then in July 2019, it will become number one. But most of all, if the current expansion endures to January 2020, then it will mark the first decade (the 2010s) without a recession.

Many people don't realize that recessions are relatively common and frequent. Before 1930, recessions occurred equally 1 to 4 times per decade. After 1930, recessions occur once per decade about a third of the time and twice per decade about two-thirds of the time. If history is a guide, we should expect 1 to 2 recessions each decade.

The current long expansion has come at great cost. Had this expansion simply grown at the historically-average rate, the economy, standards of living, and average worker incomes would be more than 20% higher than they are today. No wonder we have a current environment of economic frustration.

2. Consistently Underperforming: The record is consistent; Standard and Poor's for the past five years presents a composite forecast from analysts that is often revised downward over the subsequent two years in the forecast horizon. Their 2016 forecast was initially $124 per share and now is nearly finalized at less than $95. 2015: $148>$87; 2014: $120>$102; 2013: $108>$100; and 2012: $93>$87. And almost every year's forecast peaked higher than the initial forecast... Regardless, profit margins at forecasted levels are well-above historical levels; expect a reversion on the horizon.

3. In the first quarter the stock market surged 5.5%, well more than underlying economic growth. As a result, normalized P/E increased to 29.4—significantly above the level justified by low inflation and low interest rates. The current status remains “significantly overvalued.”

4. The update to the current secular bear chart reflects a cumulative 216% cyclical bull surge. Visually, the market appears to have built a base over the past few quarters and is using that base as a launching pad. Don't be deceived. The stock market requires financial principles to sustain gains. Technical bases are helpful when there’s room for the principles to propel the market.

5. Stock market volatility plunged in the first quarter to the lowest 4% of periods since 1950. High or rising volatility often corresponds to declining markets; low or falling volatility is associated with good markets. The current period of ultra-low volatility is a reflection of a good market, not a predictor of good markets in the future.