The Bull Market Is 8 Years Old. What’s Next?

The second longest post-WWII bull market is supported by strong fundamentals but P/E ratios are rich by historical standards

This week the post-crisis bull market in stocks is celebrating its eighth birthday, which raises the question: Will it make it to number nine?

Sam Stovall, chief investment strategist at CFRA, says in his latest note that there’s a good chance the rally will continue but the gains won't be meteoric. He’s targeting 2,460 for the S&P 500 in the next 12 months, which is less than 4% above current levels.

Stovall notes several reasons he expects the rally will slow but not end “despite its age and rich valuation." The current bull market is the second longest-running since the 10-year tech bubble that began on Oct. 11, 1990 and ended March 24, 2000. Its 12-month price-to-earnings ratio for the S&P 500 is 25, compared with 30 during the tech bubble.

  • The dividend of the S&P 500 is 2%, 50 basis points less than the 2.5% yield on the 10-year Treasury note. Since 1953, whenever the yield on the S&P 500 was within one percentage point of the yield on the 10-year Treasury, the S&P has risen almost 80% of the time, and the average gain in the following 12 months was 11%.
  • The yield curve is not indicating a recession. When it has in the post-World War II period, the spread between the 1-year and 10-year Treasuries was below 50 basis points or negative. It’s currently a positive 1.5 percentage points.
  • Other “fairly reliable” pre-recession indicators including the year-over-year changes in housing starts and consumer confidence are also “well above” prior levels that signaled the possibility of an impending recession.
  • The Federal Reserve is expected to try to balance rate hikes to limit inflation without constraining GDP growth, and tax reform could help boost growth.

Despite these supports for further gains in the stock market, Stovall is not entirely sanguine about the current market situation and admits there will likely be occasional stumbles ahead.

“Volatility will remain a potential challenge to the intestinal fortitude of many investors and cause their emotions to become their portfolio’s worst enemy,” he writes. He advises investors “to be on the lookout for a FOMO (fear-of-missing-out) mindset that could signal overconfidence and sound the final lap.”

Jeffrey Saut, chief investment strategist at Raymond James, writes that it may seem that the current trajectory of the stock market can’t last because there have been “no dips along the way,” but like the 1995 stock market that it resembles, it can continue to ascend. The S&P 500 gained about 34% that year, and the average loss in dips, according to Saut, was less than 3%.

Brad McMillan, chief investment officer at Commonwealth Financial Network, is also positive about the stock market, noting that consumer and business confidence is improving and "significant support" could come from earnings estimates, which are “likely to be fairly close to reality” and more likely to be revised up than down as fundamentals continue to improve.

The reality, of course, is that no one knows for sure where the stock market is headed. “We’ve learned with every 5% correction that there is just no way to know which one will mark the end" – suddenly like in 1929 or more gradually like in the late 1960s, writes Michael Batnick, director of research at Ritholtz Wealth Management. "Either way, the most important question the average investor needs to ask themselves is this: Can I stick with my current allocation whether the bull runs for another few years or whether it ends tomorrow?"

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