Life After the Bull Market—What a trade war, falling asset prices, and risk-averse investors mean for the stock market’s long-term outlook

By Jeff Reeves

It has undeniably been a very good run for stocks since the dark days of the financial crisis roughly a decade ago.

Since the market lows of 2009 through January’s all-time high, the Dow Jones Industrial Average soared more than 300 percent.[i] Many stocks’ gains have dwarfed even those impressive returns, including the $850 billion technology giant Apple, which has seen its stock price grow tenfold since early 2009.

But lately, things haven’t been quite as rosy for the stock market.

In February, the Dow plunged 1,175 points in a single day to mark its worst numerical decline in history.

Then in March, the stock market slumped even lower on fears of a global trade war after President Donald Trump announced tariffs on imported steel and aluminum. And in April, the administration announced $100 billion in new tariffs on Chinese goods.

Identifying the top of the stock market is incredibly difficult, and there have been countless premature warnings over the past several years that insisted this record-breaking run was over. But when you look at the big picture—particularly the realities of a possible global trade war—it seems prudent to at least entertain the notion that the end of this 9-year-old bull market and economic recovery may be very near.

Trade Wars Seldom End Well for America

I believe the biggest risk of downturn for the stock market and the U.S. economy is a trade war, sparked by March actions in the White House to limit imports and reduce trade deficits.

To begin with, most economists agree that trade deficits and a reliance on imports are not the bogeyman some like President Trump make them out to be. In fact, Scottish economist David Hume wrote back in 1752 that “jealous fear” over trade imbalances in one area are counterproductive to holistic growth in a healthy economy. “I should as soon dread, that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry,” Hume wrote.[ii]

More recently, Daniel Griswold of the Cato Institute in 1998 bluntly said that, “There is no connection between trade deficits and industrial decline.”[iii]

But while Americans have little to fear from current trade deficits, I believe the same cannot be said for protectionist and anti-trade policies that have been proposed of late.

For instance, a roundtable of global CFOs surveyed by financial media mainstay CNBC found that roughly two-thirds expect a negative impact on their company.[iv] And these aren’t small players, either—the group manages the finances of companies that collectively are valued at more than $4.5 trillion.

And beyond the specifics of current tariffs, virtually all economists agree that hostile trade policies are generally bad for all parties thanks to well-documented failures of protectionist policies in the past. (Perhaps that’s why even traditionally free-market stalwarts like Sens. Orrin Hatch, John Thune, Ron Johnson, and Ben Sasse—all Republicans—have been vocal in their opposition to the president’s plan.)[v]

Consider the infamous Smoot-Hawley Tariff Act of 1930, which raised duties on hundreds of imports in a misguided attempt to soften the blow of the Great Depression. Instead of propping up American businesses, the action instead prompted trading partners to respond in kind—grinding world trade to a halt.

To be clear, protectionism didn’t cause the Great Depression. Things were already troubling in 1930, after the Black Tuesday crash for stocks the prior year and U.S. unemployment jumping from a rate of 3.2 percent in in 1929 to 8.7 percent by 1930.[vi]

But Claude Barfield, a resident scholar at the American Enterprise Institute, recently noted that Smoot-Hawley undeniably threw gasoline on the fire. In hindsight, he opined that it’s clear that the misguided trade law “prolonged [the Great Depression] and possibly deepened it around the world, not just in the United States but for other countries.”[vii]

That seems particularly troubling at a time when the stock market and perhaps even the U.S. economy seem to be slowing down.

For a more recent example, consider very similar actions on steel imports taken by President George W. Bush in 2002, and originally meant to extend into 2005. The cause was simple: Dozens of U.S. steelmakers had declared bankruptcy in recent years, and politicians wanted to protect the industry and its workers.

However, what transpired was a World Trade Organization (WTO) threat of more than $2 billion in sanctions against the United States if tariffs weren’t rolled back immediately. When the Bush administration didn’t back down, the European Union threatened tariffs on everything from Florida oranges to Michigan-made automobiles.

The steel tariffs, put into place in March 2002, were gone by December.

Later, a 2005 review of the short-lived tariffs showed that things could have been much worse if the tariffs hadn’t died so quickly. It found that “costs … outweighed their benefits in terms of aggregate GDP and employment as well as having an important redistributive impact.”[viii]

History provides countless other examples of how barriers to trade create barriers to growth.

So it’s not much of stretch to say that if the protectionist rhetoric of March and April persists in 2018, things could get very rocky indeed.

The Means of a 2018 Trade War May Be Worse Than the Ends

Perhaps even more troubling than the dollars and cents of a looming trade war is how we wound up here. Because while Smoot-Hawley and the Bush steel tariffs ended up being misguided when viewed through the lens of history, they were put into place through the normal structure of global trade laws.

With the current protectionist policies of the White House, however, trade policies are being created unilaterally and via very unconventional means.

This is clear in the March tariffs on Chinese steel and aluminum, for which President Trump invoked Section 232 of the Trade Expansion Act of 1962 as a justification for the move.[ix] Previously, this exception to a decades-old trade pact had rarely been used, such as in the case of oil imports from Libya in 1982.[x]

But the current use of Section 232 is to create blanket trade barriers, not targeted restrictions on what most would see aimed at bad actors with malicious intent. On Feb. 16[xi] the Commerce Department cited Section 232 as its reasoning for broad curbs on metal imports because America’s armed forces and “critical industries” need a robust domestic supply.

However, even if one agrees with that reasoning, there was no detail on how much steel and what kinds are actually used by the defense industry—let alone where those specific products were imported from and how the moves would help the situation.

Instead, the recommendation was simply to increase overall capacity from a utilization rate of 73 percent to 80 percent, and thus bolster the U.S. steel industry.

In a review of the recent steel tariffs, the Institute for China-America Studies remarked that “the purpose of the tariff is to restore the economic viability of the domestic industry. The steel requirement of the Department of Defense is modest and U.S. domestic steel production—not counting employment or profit margins—has been remarkably stable over the past two decades.”[xii]

To be clear, the use of tariffs to bolster a domestic industry is nothing new. But deploying a national security exception in a transparent attempt to achieve those ends is noteworthy.

These exceptions are fully legal and are included because no government could in good conscience sign a treaty without them, Charles Hankla, a professor of political science at Georgia State University in Atlanta, told me in an interview. However, “the U.S., as the primary creator and traditional guarantor of the international trading system, has historically been reluctant to use security exceptions,” he said. “In fact, there have only been three previous uses of Section 232, the last one in 1992.

“Ultimately, the world trading system depends on these norms as much as it depends on black-letter laws and treaties,” Hankla adds.

The invocation of Section 232 is not an isolated instance, either. The Trump administration has also found shelter in Article XXI of the WTO treaty that allows a member to levy tariffs “for the protection of its essential security interests.” Here, as with Article 232, the administration is invoking rarely used exceptions to global trade laws to achieve efforts that previously were enacted through conventional means.

The consequences of the Trump administration exploiting these loopholes is unclear. Any retaliatory tariffs or sanctions from bodies like the WTO are still very much in early stages, and certainly there will be more changes to come.

But fundamentally, that uncertainty and risk is the biggest drag on financial markets right now.

Only One Link in the Supply Chain

And even if these policies do accomplish their narrow goal of bolstering domestic steel and aluminum producers, the overall effect on the U.S. economy—and the U.S. stock market—remains another big question mark. After all, the number of U.S. metal producers positioned to benefit from the president’s move is relatively small; many, many more companies depend on the products that steel and aluminum companies make as inputs in their own products, and their margins will feel the squeeze as a result.

“Industries that buy steel and aluminum, not to mention agricultural exporters, employ many times more people”—and produce many more goods—“than the industries that the president wants to protect,”[xiii] said Peter A. Petri, an economist at Brandeis University’s International Business School.

So while a modest number of companies could see a small boost from these policies, many more companies are likely to be hurt by higher input costs—not to mention increased uncertainty regarding longer-term forecasts. President Trump’s penchant for delivering momentous economic policy decisions via Twitter, for example, makes it difficult for companies to commit to big, capital-intensive projects, and investors are getting justifiably wary. “Business investment depends on predictable policy,” Petri adds, “and relentless chaos takes its toll.”

Beyond Trade Headlines, Trouble Was Already Brewing

The prospect of a looming trade war in 2018 is indeed cause for concern and worthy of attention. And understandably for many investors and consumers, the day-to-day headlines instruct them as to the health of the overall economy.

But in truth, there are even more issues at work that may herald the end of this bull market—and they are structural ones.

For starters, its length alone makes it an outlier. Looking back at every period of stock market gains for the Dow Jones Industrial Average dating back to the year 1900, only two are bigger in their raw percentage of returns—a 495 percent rally in the “Roaring ’20s” that lasted 96 months from 1921 to 1929, and a 372 percent run across 56 months from 1932 to 1937 near the end of the Great Depression.

Regardless, the rally for the Dow is the longest in its history at an incredible 107 months[xiv] through January 2018.

Beyond the outlier status of this bull market in both magnitude and duration, it’s also worth looking at how stocks are valued in 2018 vs. other periods in history—including periods right before a bull market screeched to a halt.

One popular measure of “fair value” for the stock market is the cyclically adjusted price-to-earnings ratio developed by Nobel Prize winning economist Robert Shiller. Known simply as CAPE, this calculation more or less compares a stock’s price to the past 10 years of inflation-adjusted profits.

The theory is that if corporate profits are getting larger, then stock prices should be moving higher to accommodate that growth, and if profits are falling then stock prices should be falling in kind. At times when profits are rising but stock prices are not, the CAPE ratio gets lower and signals a buying opportunity. But at times of irrational exuberance—when profits haven’t grown but stock prices continue to march higher anyway—CAPE readings are elevated and signal the market may be overvalued.

Over more than 100 years of data, the mean CAPE ratio of the stock market at large is roughly 16.8 and the median measure is 16.2. In 2018, the CAPE ratio of the market is about twice that at roughly 31.5.

Worse, the only time CAPE has been more elevated than at the current moment in time is back in 2000, right before the dot-com bubble burst. And just a few points below the current reading of 31.5, CAPE hit a peak of about 30 in 1930 right before the Black Tuesday bloodbath that began the Great Depression.

All this “feels a bit like being on mile 21 of a marathon,” author and investment manager Meb Faber of Cambria Investments tells Contingencies.

“If you look at a basket of common valuation metrics—things like price-to-earnings, price-to-book, price-to-free-cash-flow, and so on—they’re all generally saying the same thing,” Faber says.

Namely, that stock prices are at levels that may not be sustainable.

Perhaps even more interesting, Faber notes that declining markets tend to be incubators of “black swan” events. In a 2011 research paper, he noted that a significant majority of the very best days and the very worst days for the stock market tend to occur in markets that are steadily declining.[xv]

“The risk of outliers and volatility are just higher when market in a downtrend,” Faber says.

This is not to say that we are assuredly in a downtrend, or even that one is imminent.

But as the stock market remains uncertain and these indicators collectively set off warning bells, it is worth understanding the stakes.

But … Is This Really the End?

It doesn’t take a great imagination to consider what may happen if the stock market continues to roll over, and if we see increasingly protectionist trade policies around the world.

The history is clear, and the consequences are real.

But unfortunately, Wall Street has a knack for plotting its own course—in both good times and bad—and there are never any guarantees that the stock market will behave as expected.

This is because, much like as in our current economic policies, emotions and narratives sometimes matter more than the facts. For every analyst who dissects a company’s balance sheet to find its fair value, there is one who simply subscribes to the “greater fool” theory—in short, that you can foolishly buy any asset at any price as long as there’s a bigger dupe who will later buy it, handing you a tidy profit.

For every money manager who examines economic data, there’s another who simply “buys the rumor and sells the news.”

For every investor who makes decisions based on revenue and profits, there’s another who only cares about “animal spirits.”

In short, the bottom line is no longer the bottom line. And despite all the attention to corporate profits and economic growth trends, most investors make decisions based on emotion, at least to some extent. In fact, many economics courses could be cross-listed in the psychology department these days.

The emerging field of behavioral finance continues to explore all the emotions and biases that make our modern economy behave as it does. But being aware of these trends doesn’t mean you have any control over them.

That means that the unfortunate reality in 2018 is that nobody knows for certain if this bull market is over, or whether protectionist policies will hamstring economic growth.

Still, it is increasingly likely that this record-breaking bull market is at or near its end.


JEFF REEVES is a financial journalist with almost two decades of newsroom and markets experience. His commentary has appeared in USA Today, U.S. News & World Report, CNBC, and the Fox Business Network.

This article is solely the opinion of its author. It does not express the official policy of the American Academy of Actuaries, nor does it necessarily reflect the opinions of the Academy’s individual officers, members, or staff.


[i] March 9 low of 6,547.05 to 26,616.71 on Jan. 26, 2018.

[ii] Of the Balance of Trade. David Hume, 1752.

[iii] “America’s Maligned and Misunderstood Trade Deficit”; Cato Institute; April 20, 1998.

[iv] “Trump’s tariff proposals, trade war will be bad for both U.S. and China: CNBC survey”; CNBC; March 23, 2018.

[v] “Trump Blasted at Home and Abroad for Plan to Impost Steel, Aluminum Tariffs”; Politico; March 1, 2018.

[vi] “Unemployment Rate by Year Since 1929 Compared to Inflation and GDP”; The Balance; March 30, 2018.

[vii] “The Great Depression Lesson About ‘Trade Wars’”; The History Channel; March 5, 2018.

[viii] “The Political Economy of Trade Protection: The Determinants and Welfare Impact of the 2002 US Emergency Steel Safeguard Measures”; Robert Read; Aug. 5, 2005.

[ix] “U.S. Department of Commerce Announces Steel and Aluminum Tariff Exclusion Process”; Department of Commerce; March 18, 2018.

[x] “Proclamation 4907”; Bureau of Industry and Security; March 10, 1982.

[xi] “The Effect of Imports of Steel on the National Security”; Commerce Department; Jan. 11, 2018.

[xii] “Trump’s Section 232 Steel Tariff—A Textbook Case of Protectionism”; Institute for China-America Studies issue primer; March 14, 2018.

[xiii] “Trump Embraces a Trade War, Which Could Undermine Growth”; New York Times; March 2, 2018.

[xiv]  “On the bull market’s ninth birthday, here’s how it stacks up against history”; CNBC; March 8, 2018.

[xv] “Where the Black Swans Hide & the 10 Best Days Myth”; Mebane Faber, Cambria Investment Management; Aug. 1, 2011.


Q&A Sidebar

How Does a Fluctuating Stock Market Affect the Insurance Landscape?

Nancy Bennett, a life actuary specializing in life insurance and risk management, is the senior life fellow at the American Academy of Actuaries. She serves as the actuarial profession’s chief public policy liaison on life issues, including risk-based capital requirements.

Here’s what she had to say about what increased market volatility and rising interest rates may mean for life insurers.


Contingencies: How do stock market fluctuations affect life insurance companies and how they manage their assets?

Nancy Bennett: First, it’s important to remember the structure of most insurers’ obligations as a starting point. The nature of a contract between the insurance company and their policyholders can vary quite a bit, in terms of the length of the guarantee and if/when the insurer will need to pay a claim. Many life insurance products cover guarantees that span 30 years or longer. A life insurer makes investment decisions in order to fund these promises made to policyholders. These promises may not come due for 30 years or 40 years, but could come due tomorrow. Generally, a life insurer will define an investment strategy appropriate for a longer time horizon (e.g., ten years or longer). By contrast, some property/casualty or health insurers issue products with a much shorter time horizon and without any guarantees. Fundamentally, a life insurer is affected by short-term market fluctuations depends on the kind of products that a given insurer issues and the nature of the guarantees and promises made to policyholders.


C: There are still big-picture market trends that affect investment plans across the board though, correct?

NB: The low-interest-rate environment experienced for 10 or 12 years continues to create financial pressures for most insurers, especially for life insurers issuing products with interest rate guarantees. When corporate bonds are only earning 4 or 5 percent with product guarantees on most products ranging from 3-4%, the anticipated product margins are reduced, placing pressure on their earnings. The equity markets have a different effect on life insurers. Regulations limit an insurer’s direct investments in the equity markets. Further, life insurance products with guarantees are typically funded by corporate bonds rather than equities. Equity markets have a much greater impact on variable life insurance and annuities, particularly, variable annuities with guaranteed living benefits.


C: If not directly, then, how might volatility or a downturn in the markets affect insurers and how they manage their investments?

NB: In the last 10 years, there has been a quest for alternative investment classes that deliver greater yield. Some of these instruments, such as equity-linked securities or real-estate-related investments, will experience greater market volatility than the corporate  bond markets. However, because of the regulations limiting alternative investments, the higher capital requirements for alternative investments, the shift in investment strategies has been relatively small.

C: How could market dynamics affect the way policyholders behave?

NB: Rising interest rates can trigger policyholder surrenders and cash outflows from the insurance company. These outflows can be the result of policyholders seeking higher yields. However, many consumers purchase insurance products as part of more comprehensive financial plan with the intent of protecting against the financial effects of premature death or guaranteeing income in retirement. Consumers purchase insurance products for reason beyond the market returns.

Insurers are able to manage the risk of rising interest rates as policyholders are not solely motivated by market changes. Insurance products are designed to discourage policyholder surrenders by imposing surrender charges that are greatest in the first ten years a policy is in force. Oftentimes, policyholders don’t exercise policy options at the most economically advantageous time. While one might expect very high surrenders after large spikes in interest rates and when surrender charges have worn off, experience does not show “rational” policyholder behavior.


C: Beyond the investment side, what about products that are tied to the stock market: Is there a risk that products like variable rate annuities or indexed life policies fall out of favor?

NB: There are certainly some products that have a cyclical nature, so they may become more or less popular in different economic markets. For example, sales of variable annuities and fixed annuities often fluctuate against the other, with variable annuities being more popular when equity markets are rising. Other products, such as equity-indexed products provide the policyholder with a portion of equity market returns, but also provide the policyholder with some protection from market volatility. Many life insurers offer a broad spectrum of products where there are products attractive in an economic market.


C: In other words, the market volatility and the risk of a decline theoretically matter … but don’t really affect the fundamentals of insurance companies in 2018.

NB: Market risks are a major source of risk for life insurers. Consequently, most life insurers have established robust risk management practices. From an insurer’s perspective and the regulators’ perspective, all insurers routinely assess their enterprise risks and report to company management and insurance regulators. These risks include how market changes affect their net cash flow position and their ability to satisfy policyholder obligations.


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