The bull market in U.S. stocks has been charging ahead for more than eight years.1
While that’s young in people
years, it’s ancient in bull market terms. Since World War II, the longest bull
market in U.S. stocks lasted for almost nine-and-a-half years. The shortest
sputtered out after just 13 months. On average, bull markets last for slightly
less than five years, according to Fortune.2
So, how much longer will this
bull market persist? No one knows for certain.
In fact, financial
professionals have different opinions about the future of the markets. Some
believe this bull market will plod ahead, while others believe a bear may be prowling.
Often, these beliefs reflect specific aspects of the market. For example:
Economic factors: In late May 2017, Chief Investment Officer and founding
member at Advisors Capital Management, Charles Lieberman, wrote in Bloomberg View he expects the bull market
to continue:3
“The
market has it essentially right: U.S. economic growth is continuing at a
moderate pace, an economic recovery is finally underway in Europe, inflation is
under control, corporate profits are rising, and there is some prospect for tax
reform and deregulation, even if whatever gets implemented is less than what is
really needed. These conditions imply continued growth in corporate profits.”
Lieberman
believes investors are holding an avalanche of cash and waiting for an
opportunity to invest. If that money begins to move into stocks, he wrote,
“That’s when we should really start to worry the market might be getting
vulnerable."3
Stock market valuations: While fundamentals are a critical component in assessing
company value, earnings must be considered in conjunction with stock price to
determine whether a company’s shares are fairly priced.
It’s
also possible to consider whether an index is fairly priced. The cyclically
adjusted price-to-earnings (CAPE) ratio measures stock market valuations. In
early June 2017, it was well above its long-term average, which may indicate
the stock market is expensive and a downturn is ahead.4, 5
Nobel
laureate Robert Shiller, Sterling Professor of Economics at Yale University and
creator of the CAPE ratio, told CNBC:6
“[The
U.S. stock market] hasn’t been this overvalued except for a couple of times in
history – around 1929, around 2000…The CAPE ratio was about the same in 1998
but it continued skyward as the dot-com froth escalated into a full-fledged
bubble. We could go back up there. And we’re in an oddball enough mood that we
might. So, I’m not saying pull out of the market – I’m saying it looks
dangerous now, but it could keep going up.”
Corporate profitability: Jeremy Grantham of GMO thinks high market valuations are,
in part, owed to corporations’ “increased monopoly, political, and brand
power.” He doesn’t expect a significant adjustment in valuations until interest
rates begin to move higher, a change that may take place over an extended
period of decades. Grantham writes:7
“…if
you are expecting a quick or explosive market decline in the S&P 500 that
will return us to pre-1997 ratios (perhaps because that is the kind of thing
that happened in the past), then you should at least be prepared to be
frustrated for some considerable further time: until you can feel the process
of the real interest rate structure moving back up toward its old level…”
Grantham
advises investors, “There are two important things to carry in your mind:
First, the market now and in the past acts as if it believes the current higher
levels of profitability are permanent; and second, a regular bear market of 15
percent to 20 percent can always occur for any one of many reasons.”7
The one thing we know for
certain is bull markets are often interrupted by corrections, which are
declines of 10 percent or more in the value of the market. In addition, we know
that, eventually, bull markets end and bear markets begin. Typically, the start
of a bear market is signaled by a 20 percent or greater decline in the value of
the market.8
When the market corrects, or a
bear market arrives, it’s important to keep your wits about you. A drop in
stock market valuations often creates buying opportunities. Selling during a
correction or bear market may not be a winning strategy. It may be better to stay
calm and refuse to sell low. Historically, after all, bull markets follow bear
markets.
What should you be doing now?
Take some money off the table by taking profits in positions that have had a
nice run. Keep your losses to a minimum by using sell stop orders. These
actions will help you raise some cash to reinvest when a correction or bear
market occurs. Start a list of potential buys that you would invest in if they
were to pull back significantly. Be prepared and be proactive—get your game
plan ready for execution before the “game” begins.
Click here to watch this informative video to
see if you are on the right track with your portfolio.
Best Regards,
Greg Womack, CFP
Sources:
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