(Bloomberg) – A bull market that has been derided as fake, doomed and history’s most-hated just earned a new title: the second-longest ever.
Dodging and weaving through three 10 percent drops in the last 19 months while avoiding the 20 percent decline that denotes a bear market, the advance that began seven weeks after Barack Obama’s first inauguration in January 2009 has now lasted 2,607 days. That matches a rally from 1949 to 1956 which straddled the presidencies of Harry Truman and Dwight D. Eisenhower. Only the dot-com bubble of the 1990s lasted longer at 3,452 days.
Yet again, the rally is showing signs of fatigue: for the first time its rolling 12-month return is negative, and companies in the Standard & Poor’s 500 Index are reporting their worst profits in six years. At the same time, economists are steadily downgrading their growth forecasts, the international outlook is much worse and investors are pulling money from equities at an unprecedented rate.
Such threats are nothing new, and speculating that anything could stop the
seven-year-old advance has always been a fool’s game. The Federal Reserve and other central banks have shown time and again that they stand ready to inject more cash into the financial system at the first sign of market turbulence.
“I don’t remember another post-war bull market that was this fearful, chronically and persistently,” said Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc., which oversees $337 billion. Investors are “forever prepared for the end of the world, but reluctantly being dragged back into to equities.”
The New Yorker writer John Brooks’ chronicle of the 1950s bull market is called “The Seven Fat Years,” a title few people would apply to America since the financial crisis. In truth, the signature characteristic of the Obama bull market has been its ability to soar above an economy going nowhere, returning 3.7 percent a quarter on average since March 2009, compared with a 0.9 percent gain in gross domestic product. That gap is the widest ever.
Bulls and bears divide on how that happened. To optimists, the 210 percent rally in stocks is justified by a commensurate expansion in earnings, achieved by managers focused on efficiency and cost cuts by the experience of the financial crisis. Pessimists see a market that rose only in proportion to the trillions of dollars in liquidity injected by the Fed.
Even without any growth this year, profits in the S&P 500 will come to about $118 a share, almost double the $62 a share recorded in 2009. While falling now, profit margins, which measure how much of every dollar hits the bottom line, are still hovering near all-time highs reached in 2014.
Another plank in the bull case says nothing happening in the stock market since 2009 represents a radical break from the past. The S&P 500 may be up 18 percent annually since 2009, but viewed from 10, 15 or 20 years ago, gains are roughly in line with the average of 7 percent since World War II.
On the other side are arguments tied to sales growth and the Federal Reserve. Revenue per share in the S&P 500 is likely to total $1,126 in 2016, about one-third the increase in profits versus seven years ago. The lower slope of increase has left the index’s price-to-sales ratio at 1.9, near a 15-year high.
Besides aggressive cost cutting, profit growth has been driven by some of the lowest financing costs ever, courtesy of the Fed. Record-low interest rates sent the cost of servicing debt to the lowest in data going back to 1990, at 3.7 percent of sales in the last 12 months. The decline from 7.4 percent in 2007 represented $310 billion in savings.
“We need a positive trajectory to economy and higher earnings to sustain the bull,” said Howard Ward, who oversees $42.7 billion as chief investment officer of growth equities at Gamco Investors Inc. “The bears argue the economy is slowing and is not poised to accelerate. Low rates, they say — after such a prolonged period of easy money — signal a liquidity trap and have fueled financial speculation.”