U.S. stocks have recently forged new ground printing a fresh set of all-time market highs. So, naturally, Wall Street being Wall Street, there is a lot of doom and gloom talk floating around. It’s like an episode of Game of Thrones with financial types staring into the distance and warning, “Prepare yourselves. Winter is coming.”
But is it?
Despite the ominous feeling that the market is dancing around new high watermarks, there are 7 reasons to believe that the current bull market has more room to run.
1. Historic precedent. It’s not uncommon for the market to hit a new high, then languish below that high for a year or more before it breaks out to another new high. It’s a historical stock market pattern that I refer to as the “oasis, desert, oasis” configuration. In fact, we’ve seen this pervasive pattern 20 times since 1928, and in 19 of the 20 times, the market is significantly higher one year after the new high (or “second oasis”) is reached. The data shows us the market has a median return of 20.8% during the post-doldrums rebound, and the market is potentially on the same glide path today.
2. Valuations are in the green zone. Stocks are currently valued at an average price-to-earnings ratio (P/E) of 18, slightly above the 14 P/E ratio we’ve seen over the past decade. This means stock-buyers are paying 18 times what companies are earning. The higher the P/E, the easier it is to argue that the market is over-priced. Back in the late 1990’s, P/E’s were running near 30, which set us up for a huge market crash. Understanding that, valuations need to be watched closely if they continue climbing higher and higher from here.
3. Stocks vs. Bonds. Another method for valuing stocks is the Equity Risk Premium, which compares earnings from stocks, and are risky compared to bonds, which are safe. Today’s Equity Risk Premium is at a two-decade high. This indicates that given the current low yield of bonds and current P/E for stocks, stocks are a much better deal than bonds.
4. The corporate earnings outlook is good. Operating earnings for the S&P 500 were -7% in the first quarter of 2016. But according to Ned Davis Research, earnings could be +8% in Q2, and there is potential for +19% earnings growth in the third quarter. Oil stocks are key to this rebound. The increase in the price of crude from $26 to $45 a barrel has helped stabilize the energy sector’s earnings, which were negative for the first time in history for 2015.
5. The Dollar is flat. A more than 20% surge in the value of the dollar against other currencies through 2014/15 reduced the dollar value of U.S. companies’ foreign earnings. In contrast, the dollar has been relatively flat in 2016, resulting in a tailwind for earnings.
6. CHIME is strong. I like to judge the overall state of the economy by a basket of measure I call “CHIME.” Currently as a whole, these indicators are very solid.
- Consumer Spending – Trending up 4 percent during the second quarter. Consumers continue to lower their household debt, while maintaining other discretionary spending.
- Housing – Existing home sales are at their highest level in more than nine years.
- Interest Rates – Money remains cheap, and access to business loans is good.
- Manufacturing – This trend has turned toward expansion and is well above where we began 2016.
- Employment – The U.S. economy added 287,000 jobs in June and unemployment is at a tolerable 4.9 percent.
7. The Fed is unlikely to raise rates. While those CHIME stats prove the economy is moving along, it’s hardly running like an F1 racecar. As such, the Federal Reserve will almost certainly move slowly on any possible rate increase.
For all of these reasons, it’s my assessment that the current bull market could continue for the foreseeable future. Of course, if I’ve done even a passable job of sharing my views, you know I believe in long-term strategies, and strongly discourage investors from jumping in and out of the market based on immediate events or even short-term trends. So, even if we do see a down turn in the coming months, know that “this too shall pass” and with a smartly crafted portfolio you’re well positioned to take advantage of the inevitable recovery.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.