Bull Market: Room to Run
Just because we’ve had a five-year rising market doesn’t mean its demise is near. We are in the fifth inning of a nine-inning long-term secular bull market in stocks, comparable to the 1982-1999 run. So declares Joseph Zidle, portfolio strategist for Richard Bernstein Advisors.
His upbeat forecast may surprise investors, many of whom remain wary and cautious. After the spring’s international crises, domestic U.S. equity mutual funds showed outflows to safer havens in bond and money market funds. But it is that very caution that bolsters the case for optimism.
Zidle delivered his optimistic forecast speaking to a June gathering of financial services professionals, sponsored by the clearing and custodial giant, Pershing.
Is Zidle’s baseball analogy suggesting that we are halfway through a bull market? No. Innings are not time-constrained – they may be shorter or longer. Baseball fans will relate.
The longest major league game on record was a 1920 contest between the Brooklyn Robins (later Dodgers) and the Boston Braves. The 1 to 1 game was called after 26 innings due to darkness. Conversely, the shortest game in baseball history was a nine-inning 1926 St. Louis Browns’ victory (6-2) over the New York Yankees in 56 minutes. Zidle’s point: We are in the early stages of a big secular (meaning long-term) bull market.
Nevertheless, we will have pullbacks. Within a secular bull market, periodic dips between 5% and 10% are common. A 20% drop from a previous high point may produce a “bear interlude” within a long-term uptrend. In a 2013 USA Today story, Kevin Pleines, equity analyst at Birinyi Associates, indicated that a long stretch without a major correction does not suggest that one is imminent.
Said he, “Looking at the history of the market, there has been no consistent point or metric during bull markets that indicate that the market is 'due' for a correction.”
Since 1957, corrections occurred on average every 1.5 years, according to David Bianco, chief U.S. equity strategist at Deutsche Bank. The average stock-price drop since 1962 is 13.5%, Birinyi data show. Investors still suffer from “recency bias” –anxiety as to how the stock market behaves based on recent experience – primarily owing to the crash of 2008-2009, when the Standard & Poor’s 500 index dropped by almost 50%.
We live in a world of uncertainty with a 24/7 news cycle. Zidle observes, if you constantly watch Crisis News Network with “breaking news” accompanied by ominous music, pessimism colors your view of the future. Dour forecasts are legion. In a January appearance on Bloomberg TV, Swiss investment advisor Marc Faber opined, “We are in a gigantic financial asset bubble,” whose bursting is coming.
Volatility, where prices gyrate, is a fact. However, there is “upside” and “downside” volatility – investors find price fluctuations in climbing markets more tolerable than in declining ones, although buying stock at the price you want is more difficult in either. You need to plan on both as a portfolio is tailored to your risk tolerance, goals, time frames and temperament.
Per Zidle, only one or more of three things end a bull market: an inverted yield curve, extreme overvaluation and unbridled euphoria. None are in evidence currently.
A yield curve is a line plotting interest rates of bonds of equal credit quality over short- to long-term maturity dates. The Treasury yield curve charts U.S. Treasury paper from one month to 30 years. Yesterday, the curve shows one month paper yielding 0.01%; two-year, 0.46%; 10-year, 2.53%; 30-year, 3.35%. The curve, says Zidle, is not inverted, but “historically steep.”
Today, we have a steep but normal yield curve, in which longer maturity bonds have higher yields than shorter maturity bonds due to risks associated with time, such as inflation. An inverted yield curve, where short-term yields are higher than long term yields, often is a sign of impending recession.
We are not looking at extreme valuations in the market. The S&P 500’s price/earnings ratio, which measures how costly stocks are, is now 19, which is higher than the historical average of roughly 15, as measured by Yale professor Robert Shiller. But it is far below the multiple’s level of 31 in early 2000, just before the tech bubble popped.
There are differing models, all debatable. However, Zidle emphasizes that markets cannot be overvalued when people are uncertain and cautious. Uncertainty equals undervaluation; overconfidence equals overvaluation. At times, we may see euphoria in single stocks like that of electric carmaker Telsa (TSLA), which has more than doubled over the past 12 months, or selected Internet plays. Yet currently, that exuberance does not extend across the board.
In short, given chaos in the Middle East, Ukraine and elsewhere, with rising oil prices, a short-term retrenchment will not surprise. In our next article, we will detail Zidle’s thinking on what he calls an “American industrial renaissance” as a case for equities.
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Lewis Walker, CFP, is president of Walker Capital Management LLC, Peachtree Corners, Ga. Securities and certain advisory services offered through the Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with Walker Capital Management. 770-441-2603. firstname.lastname@example.org.
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