It’s the second-longest bull market in history. Stocks are expensive. This is the top.
At least, that is what I keep hearing — from asset managers, traders and, of course, the news media. I’m not hearing much from the public, which seems to have lost interest in the entire stock-picking/trading/market-timing/macro-event thing, and are focusing instead on making regular contributions to mutual fund indexes via Vanguard and Blackrock.
I want to push back against three ideas:
Length: Those who claim this is the second-longest bull market in history (conveniently) use March 9, 2009, as the starting point. This is incorrect, something I will detail in a future column. The short version is that the bull market really began in 2013, when the major indexes breached the earlier highs set in 2000 and 2007. By that measure, this bull market is only three years old and could easily have a long way to go.
Expensive: It’s easy to draw the conclusion that stocks are pricey. Relative to earnings, they are certainly above their long-term medians. But to reach that conclusion, you must ignore two other important and related factors: Inflation and bond yields, both of which are at or near record lows.
As I have pointed out before (see this and this), you can choose from a variety of measures that show stocks as cheap, expensive and everything in between.
Sentiment: What strikes me the most is the lack of enthusiasm for equities. I was reminded of this by a Bankrate.com poll (see chart below). A quarter of all respondents said the best way to invest money they wouldn’t need to touch for a decade or more was real estate. Next was cash or equivalent investments (23 percent). Stocks came in third, tied with gold and precious metals (16 percent). Back in 2013, four years after the bear market had bottomed, a similar Bankrate.com survey found that just 14 percent of Americans believed that stocks were the best long-term investment.
Such a minimal gain in favor of stocks sure doesn’t look like irrational exuberance to me. Bull markets tend not to end when there this little optimism for equities.