This Bull Market Could Run Another Three Years

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Here’s a slap for all those market pundits who are trying to predict the end of the bull market in stocks.

Cool your jets, guys. You may have to move your predictions out as much as three years, and it’s all thanks to corporate bonds.

This one will floor you…

Public pensions are pouring money into high-yield debt instruments – corporate bonds and leveraged loans. This will not only drive the stock market higher – yes, you heard me right, bond buying will drive the stock market – it will also accelerate the upward price momentum of stocks.

I kid you not. Here’s why…

To meet the 7.5% return that public pensions must earn to make good on their obligations, they are pouring money into corporate debt. That’s the only place paying enough to meet their needs.

The corporations selling the bonds to the pension funds are using the cash from the sale of their bonds to buy back their shares.

How much are they buying?

Corporations, which have been the primary buyers in this market, are driving this bull market and have bought back $3.2 trillion of their own stock since 2009.

Main buyers – mutual funds, insurers, hedge funds, households, foreign buyers, broker dealers, pension funds and exchange-traded funds – for the same period have sold $9.39 billion worth of stock.

The credit market during the same period has grown by $3.3 trillion. That’s almost a one-to-one relationship between bond purchases by pension funds and share repurchases by corporations.

Well, here comes the technical stuff no one really understands, but bear with me…

The only way this credit market to stock repurchase trend can taper or end is if the yield on the 10-year Treasury drops to less than the yield on the two-year note. It’s called a yield curve inversion.

And a yield curve inversion could take as much as a year to develop. In the past, when we did have an inversion, it took two years before it had a significant effect on the market.

That means this corporate debt to share repurchase relationship could conceivably last another three years. And since share buybacks are driving the bull market, it could run for three more years too.

The best part of this whole thing, at least for us “bond heads,” is the boom we have witnessed in bond prices could intensify, not fall off, over the next few years.

Correct me if I’m wrong, but wasn’t every “stock head” in the world calling for the collapse of the bond market for the last eight or nine years?

I hate to use clichés, but this one fits… If you live long enough, you’ll see everything.

And buying in the corporate bond market driving a bull market in stocks qualifies as everything.

Good investing.