It has certainly been a long bull market. That’s for sure.
If we consider early March 2009 as the starting point, then we are roughly 90 months into the current bull market in stocks (a market unbroken by a 20% decline in the S&P 500.) Only the bull market that ran from December 1987 to March 2000 was longer (149 months).
As far as bull markets go, our current bull market is certainly long, but it hasn’t been exceptionally strong given the time it’s been climbing.
The S&P 500 is up roughly 220% since March 2009. This is only the fourth-strongest advance. Three other bull markets moved higher, with one a quantum leap ahead of the rest: The 1987-to-2000 bull market saw the S&P 500 rise 580%.
Of course, what goes up must come down eventually, and this is the concern. The bear market that began in late 2007 and ended in March 2009 wiped 870 points, or 56% of value, off the S&P 500. The bear market that began in 2000 and ended in late 2002 erased 800 points, or 46% of value. Morningstar data show that the average bear market that follows the bull market lasts 18 months and produces an average 40% drop in the S&P 500.
But this time is different, as is any market compared to any other market. The current bull market is exceptionally long, but lack of relative strength mitigates risk. This is one reason I’m sleeping well at night.
Valuation is another, which I’ll concede is on the high side. The average five-year forward P/E is 14.8; the average 10-year forward is 14.3.
But at the height of the 1987-2000 bull market, the S&P 500 traded at 26 times forward earnings estimates. And even when the subsequent bull market began in 2002, the S&P 500 was still trading at 22 times forward estimates.
The S&P 500 is pricey these days, but hardly egregiously so, and even less so when interest rates are factored in. When you compare the higher interest rates that prevailed in past bull markets to the basement-dwelling rates of today, higher P/E multiples are further validated. Here’s why: interest rates are a discounting mechanism applied to future earning – the lower the interest rate, the higher the present value of future earnings. Today’s low interest rates support higher valuation multiples.
As for today’s low interest rates, I expect them to hang around for a while. Traders are betting a 53% chance the Federal Reserve will raise the range on the federal funds rate – the base rate for all other rates – at its upcoming December 14 meeting. Most traders believe we’ll see no more than a 25-basis-point increase in the range by the end of the year. This is the same amount the Fed increased the range when it last raised the fed funds rate in December 2015.
While the Fed might be prepared (though I’m still unconvinced it is) to temper the party by diluting the punch bowl with mixer, other central bankers continue to spike it with schnapps, sake, and gin. Our central bank might be prepared to raise interest rates, but don’t expect central bankers in the European Union, Japan, and England to follow suit. They have demonstrated with recent interest-rate cuts that they’re quite willing to keep the party going.
Sentiment, more than anything, allows for a sound night’s sleep. Euphoria would hardly be the word to describe investor sentiment. The latest sentiment survey from the American Association of Individual Investors (AAII) shows 29.7% of individual investors are bullish, 28.5% are bearish, and 41.8% are neutral. The historical average is 38.5% bullish and 30.5% bearish.
What’s more, the pros are even more bearish than the amateurs. Bank of America Merrill Lynch’s index of analyst sentiment fell to its lowest level in three years in August. When analyst sentiment has been this subdued, stock-market returns have historically been positive in the subsequent 12 months.
In short, valuations, though elevated, remain reasonable; central bankers remain accommodating; and investors remain sufficiently worried. Corrections rarely occur when the market is underpinned by these market-supporting characteristics.
Stephen Mauzy, CFA