Calling The Top Of A 45 Year Bull Market

In January I wrote an article pointing out that long-term equity valuations were unparalleled, and that if history repeats itself, we can expect the next ten years to return approximately zero.  

My reasoning then was based on valuations.  More recently, two other important reasons to expect a substantial fall in markets, and perhaps worse, have slotted into place.  One is the long-term impact of America’s folly in instigating an unnecessary war in Iran.  The second is a clear reversal in liquidity – i.e., the money and credit circulating around the world.

This article looks at both of these, and by the end of it I hope you will understand why - after nearly 20 years of broadly being bullish about equities (OK I took my foot off the pedal a couple of times) - I am now ready to call a major bear market.

Secular change in liquidity

The first is a secular change in liquidity.  That may sound surprising when I, backed by data from Michael Howell at GL Indexes (formerly CrossBorder Capital), consistently talk about the liquidity cycle.  I’m not suggesting that that cycle will disappear, but the backdrop has changed substantially.  

Since the days of the Greenspan put in the 1990s, equity investors have implicitly or explicitly relied on central banks to come to the rescue with loose monetary policy whenever there has been a financial or market crisis.  In the new world, they may still have to do that, not to rescue equity markets, but to stop the fragile but vital overnight repo markets ecosystem from collapsing.

The difference is the political will.  Bessent at the Treasury and Warsh, imminent at the Federal Reserve, are both clear that their priority is Main Street and they would like to withdraw much of the QE monetary stimulus of the past era by reducing the Federal Reserve balance sheet.  They will therefore be more reluctant to ride to the rescue of Wall St.  That vastly increases the likelihood that they will not do enough or do it too late, and there will be another financial crisis.

The Decline of America will be faster

The second part of the jigsaw is the decline of America.  Let me be precise what I mean by this.  All empires decline eventually, and the reason is usually financial.  Servicing the interest on today's debt consumes US$1.2 trillion or 23% of Federal tax revenue, and will soon become the single largest item of expenditure. That number is only going to rise, as at least US$8 trillion of low-cost pandemic era debt is due to be refinanced in 2026 at significantly higher rates..

The unnecessary war the U.S. has embroiled themselves in will not come cheap either. The primary deficit for 2025 is estimated at a little under 6% (US$ 1.78 trillion over GDP of US$30.7 trillion).  Unbudgeted costs for this war have been estimated at US$ 16.5 billion over the first twelve days, and about $1 billion a day since then.  At these levels, the fiscal deficit will rise by about 1% after nine months.  This data does not include anything for reconstruction or reparations.   

In the short term, they are leaning on shorter term bill issuance to avoid long bond yields rising excessively.  The consequence of shorter duration is having to refinance (much) more often.  In the longer term, they will have to use the bond markets, and they will then be reliant on other nations purchasing.  Some will, but the actions of the U.S. in 2026 have cost them many friends.  At the very least, like the U.K. a hundred years ago, they will find themselves increasingly at the behest of other nations.

U.S. voters have drunk the Kool Aid

I am not alone in pointing out that there will be no easy way out of this war with Iran.  I am old enough to remember the agonising (from a U.S. perspective) newspaper reports of the last five years of the Vietnam war – a war where the political and strategic objectives were never clear.  While troops are not yet on the ground in any numbers, and the body bags have not yet started landing back in the U.S., there are many similarities today.

One irony is that military capability is the one area where the U.S. is clearly ahead of its competitors.  It may be rational to use this opportunity to achieve strategic aims before China (or others) catch up.  But there do not seem to be any set objectives other than degrading the Iranian military capacity.

Older readers may recall a tragic episode in 1978 of a cult’s mass suicide by drinking poisoned Kool Aid.  It seems to me that the American populace have similarly drunk the Kool Aid.  They are failing to apprehend the folly of their leader’s policies, and how it can only accelerate the passing of the American hegemony.  There is an argument that the rest of the world will suffer more than the U.S., but the U.S. is not going to escape.

Transparency in equity markets is falling too

Another less sung decline (for investors) is the decline in shareholder transparency in the U.S. and the U.K.  Effectively, shareholders are finding it increasingly difficult to know what is really going on in the companies they own shares in.  Add that to weaker governance (e.g., disapplication of shareholder rights, expropriation, political interference in corporate behaviour), and it really matters:  if shareholders start to worry about receiving their fair share of a company’s profits or assets, the risk premium must rise.

The lights are flashing red

All of this tells me not that the U.S. has started its decline, but that the direction is now fixed and the pace will be faster than we had assumed.  Given that the U.S. still represents 70% of global equities, and the largest stocks are at such high valuations, they point to a much tougher environment to make money.  

I have for the past few years said that the ability to be more tactical is going to be important.  The last 40 years, and especially the last 17, have been ones where beta (market direction) has dominated.  Any market wobble has almost invariably been immediately reversed as a result of central bank intervention – the only exceptions are the 1990-1991 and possibly the 2002-3 recessions.

In the new world, we can expect bond yields to be more volatile around a higher ‘normal’ level.  Alpha will be more valuable, whether generated from deeper analysis or better judgement.  Risk premia for corporate bonds and equities should rise because defaults, so rare since the Global Financial Crisis, will be more common.  

Once that has happened, there may be good opportunities for investors to re-enter the market.  But right now the lights are flashing red, especially for ‘buy and hold’ type investors.  In my view we are now at the top of a 45-year bull equity market.  Even I have not experienced what lies on the other side, though I learnt from men (yes, men in those days) who had lived through the 1970s.