History Points to a Stock-Market Slaughter

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The run has been exceptional by any standard.
The current bull-market run in stocks commenced in March 2009. If we want to be specific, we can point to March 6, 2009, as the gate exit.
The S&P 500 Index had bottomed at 683 in those dark, dank days of early March 2009. Here we are, 102 months later, and the S&P trades in the brilliant glow of 2,560 — mere points away from a fourfold increase in value.
No one will deny that a 102-month run is a long run in the annals of bull markets. It’s practically a marathon. We’ve seen only one bull run longer.
The longest a bull galloped nonstop occurred during the 1990s tech revolution. Stocks ran for 113 months — October 1990 to March 2000 — without experiencing a 20% decline in general market prices (the official end of the run). The S&P 500 quintupled over the decade.

End of the Longest Bull-Market Run

And how did the longest bull-market run on record end?
It ended as it ends for many tired, spent bulls. It ended with a slaughter.
The S&P 500 was at 1,520 in March 2000. A year later, the S&P 500 traded at 12,000. Two years later, it traded at 800. The S&P 500 lost 47% of its value.
Precedence has many market commentators on edge. Few are edgier than the commentators at Barron’s. This esteemed financial publication has formed a habit of leading with sanguinary headlines in recent months.
“Will Stocks Take a Big Hit in August?,” “Ready? September Could Torpedo Stocks,” “The Worst of Times? S&P 500 Hits Record as Stocks look Ahead to October” were the lead Barron’s articles for August, September, and October.
I’m hesitant to say this time is different. Knowing something of stock market history, the infamous words of economist Irving Fisher spring to mind.
Fisher sealed his position in infamy with the following declaration: “Stock prices have reached what looks like a permanently high plateau.” Fisher’s declaration occurred in September 1929. A month later, the market crashed and the Great Depression despoiled the economic landscape for the next decade.
But it is different. It always is. No two market epochs are alike. Yes, most bulls go to slaughter, but not all. The bull-run in the 1950s ended with the bull sent to pasture. The correction was mild and short-lived.
Unlike the bull-market run of the 1990s, this bull is marked by aloofness. Euphoria, which ends most bull markets, remains suppressed.
The latest reading of the American Association of Individual Investors (AAII) Sentiment Index tilts slightly toward bullishness. Of the individual investors surveyed, 39.6% claim to be bullish, 33% claim to be bearish.
The bulls are marginally above the historical average; the bears are also marginally above the historical average. When the last bull-market run ended in March 2000, bullish sentiment ran wild at 75%.
I’ll concede that investors are willing to pay more for earnings these days. That’s a concern.
The forward 12-month P/E ratio for the S&P 500 is 17.0. This P/E ratio is above the 5-year average (15.6) and above the 10-year average (14.1), according to FactSet data.

Mitigating Factors

Relentless earnings growth is a mitigating factor. Companies continue to surprise to the upside. With 17% of the companies in the S&P 500 reporting actual results for the third quarter, 76% of S&P 500 companies have reported positive EPS results, according to FactSet.
Interest rates are a mitigating factor. They remain low. Low interest rates support high stock valuation.
Interest rates are an important variable in discount rates. Lower interest rates produced higher present values. A simple example follows.
Let’s say you have an investment that pays $10 annually in perpetuity. If your discount rate is 3%, you’ll pay up to $333 for that investment. If your discount rate is 6%, you’ll pay no more than $167 for that investment.
Interest rates were much higher at the end of the last bull-market run compared with this one. The 10-year U.S. Treasury note was priced to yield 6.2% in March 2000. The same note is priced to yield 2.4% today.
We have a stock market imbued with low investor euphoria, low interest rates, and continual earning growth. A market correction wouldn’t be impossible, but it would be improbable.
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