Happy Belated Birthday Bull Market

The financial crisis of 2008 seems like such a long time ago. During the crisis, we saw the collapse of Lehman Brothers, bank bailouts and forced mergers, massive federal stimulus, and extraordinary Federal Reserve (Fed) policy. We experienced near unprecedented stock market volatility when daily stock market moves of 5% or more were not uncommon. Despite these extreme conditions, one of the greatest six-year bull markets emerged from this crisis.

Now, we are celebrating another (belated) birthday of the bull market that began on March 9, 2009. (A bull market is defined as a prolonged period of stock market gains without a 20% or more decline.) Not only has this bull market for stocks lasted a long time from a historical perspective (it is the third-longest since World War II), it has also been the strongest six-year-old bull.

As the bull market enters its seventh year, many are wondering whether this bull has another year left to run. As should not be surprising given its age and the strong returns it has produced, this bull market may be due for a modest correction. But, that does not necessarily mean that a downturn is imminent. Risks always loom somewhere and, right now, they are in the form of terrorism, the Russia-Ukraine conflict, the possibility of a nuclear Iran, the energy downturn, and the Eurozone’s struggles.

However, there seem to be enough factors supporting this bull that it could continue its charge:

·         Bull markets do not die of old age, they die of excesses, and there does not seem to be any evidence today that economic excesses are emerging in the U.S. economy.

·         The Fed typically reacts to built-up excesses with multiple rate hikes, contributing to the start of recessions. The slow economic recovery we have experienced has delayed the formation of excesses and the start of the Fed’s rate hike campaign.

·         Though valuations are slightly expensive by historical standards, prior bull markets have shown that corporate earnings gains can lift stocks for quite a while even after valuations exceed long-term averages and stop expanding. Valuations have proven to be good indicators of long-term stock performance; they have not been reliable shorter-term indicators.

·         Low inflation persists, which helps increase the value of future earnings and dividends.

·         Economic and market indicators that have been found to be effective in signaling recessions and stock market downturns suggest the economic expansion and bull market have the potential to continue through 2015.

Given this backdrop, I believe remaining fully invested in a diversified portfolio is prudent. The outlook continues to be positive for modest gains in stocks based on the underlying strength of the U.S. economy, a rapidly improving employment backdrop, and accommodating global central bank policies. Thus, we can be optimistic that we may be blowing out seven candles on this bull market’s birthday cake next year.   

As always, if you have any questions, I encourage you to contact me.