The bull market in stocks just turned five, so happy birthday to the bull, and many happy returns to us all!
This week marks the fifth anniversary of the March 2009 low for the S&P 500 Index and the subsequent birth of a new bull market, which has racked up gains of 205.6 percent so far, including reinvested dividends.
In terms of price appreciation alone, the current bull market has advanced 177.6 percent since that fateful day on March 9, 2009 when it seemed the financial world was falling apart with the S&P 500 closing at a low of 676.53. Since then, the blue-chip index has racked up more than 1,200 points along the way to last Friday’s all-time high of 1,878.
This auspicious anniversary for the stock market has many investors questioning whether or not the bull has the legs to stampede even higher from here.
|Many investors are questioning whether or not the bull has the legs to stampede higher from here.|
If the past is prologue and using history as a guide, the answer would be yes.
A bull market as it’s typically defined is an advance of 20 percent or more without a 20 percent correction along the way. By this methodology, according to data from Merrill Lynch and Bloomberg, there have been 25 bull markets since 1929.
* The average bull market lasted about 31 months and appreciated 105.5 percent.
* By these measures, the current bull run — at nearly 61 months and up 177.6 percent — is certainly above average. But is it on its last legs?
* In fact, this has been only the fifth-best bull market on record as measured by time, and is in fourth place in terms of performance.
Top honors go to the tech stock-fueled bull market from 1987 to 2000, when the S&P 500 advanced a staggering 582 percent over 150 months. That was the best, but the top five bull markets, not including the present, averaged a gain of more than 300 percent.
This means the S&P 500 has the potential to tack on nearly 1,000 more points before this bull market is done.
Other investors worry about market valuations being a concern that could cut short the longevity of this bull market, but the evidence is mixed on this point.
The S&P 500 Index has a forward Price-Earnings (P/E) ratio of 15.4 times earnings right now (above chart top panel), which is still a bit below the longer-term average P/E of nearly 16. And it’s well below the peak in 2000 when stocks commanded a lofty P/E of nearly 25 times profits.
Another measure, the cyclically-adjusted P/E ratio, takes a bigger-picture view by averaging the past 10 years of earnings to smooth out the often volatile swings in corporate profits from one year to the next. By this measure stocks look overvalued with a reading of 25.4 compared with the average cyclical P/E of 16.4 over the past century (above chart bottom panel).
Stocks don’t look particularly cheap by other valuation yardsticks either. For instance, the total market cap of all U.S. stocks at the end of 2013 stood at 125 percent of U.S. GDP, above the previous peak in 2007 just before the last bear market began.
And from a sentiment perspective, there is more to worry about; namely complacency is setting in among investors, which is to be expected after a five-year long bull market.
A recent sentiment survey by Investors Intelligence reported the lowest number of “bears” among investment newsletter advisors since 1987 … and we all know what happened in October of that year.
In other words, investor confidence is running high, especially after last year’s 30 percent plus gains for the S&P. Of course this is one of the most reliable contrary indicators I follow, which means when investor sentiment turns this bullish, perhaps there’s nobody left to buy.
The Federal Reserve’s ongoing policy of holding interest rates near zero has contributed mightily to the bullish sentiment extreme. Just how much is difficult to say, but it’s clear that in a world of ultra-low interest rates, both professional and retail investors alike have come to believe there is really no other game in town but to invest in stocks.
In my view, this belief has not yet attained widespread cult-like status, as it did with tech stocks in 2000, or housing in 2007. Plenty of investors are still nervously eyeing the exits today, or reluctant to commit more money to a market that has nearly tripled over the last five years.
The Fed has already begun the long process of normalizing interest rate policy by tapering its bond-buying program known as QE, but the Fed is only taking baby steps so far. In fact, technically the Fed is still pumping more money into the economy each month, just at a somewhat slower pace than before.
At some point this year, unless the economy falls off a cliff beforehand, the Fed will end QE. Later still, perhaps a year or more away, interest rates will rise back to levels we used to consider normal in the good old pre-financial crisis days. That’s when this bull market will face the ultimate test, but that reality check may still be down the road.