This bull has legs
By Bob Landaas
April marks the fourth anniversary of the latest bull market. Those who aren’t bullish might feel sheepish to learn that the average bull market since World War II has been a little longer than four years.
But bull markets don’t die of old age. They typically die because of speculative frenzy. They typically die from a rapidly growing economy. They typically die because of surging inflation. They typically die because the Federal Reserve is raising interest rates.
It’s only fair to examine the legs of the current bull market, to compare conditions now to the peaks of past bull markets. In key ways, times are different from previous turning points.
- Economic growth. Sam Stovall, chief equity strategist at S&P Capital IQ, has noted that quarterly GDP was rising more than 4% at the top of previous bull markets, vs. 0.4% in the fourth quarter of 2012.
- Stock valuations. Past bull markets have ended after S&P price-earnings ratios have exceeded 18 over the previous 12 months. The latest ratio is 15.22.
- Investor sentiment. Typically at market peaks, around 60% of investors surveyed by the American Association of Individual Investors describe themselves as bullish, vs. 35.5% now.
- Consumer sentiment. Rallying at past peaks, consumer sentiment has recovered to 78.6 in recent months after falling from 82.7 in November, but it’s still far behind its 2007 mark of 90.4, according to the University of Michigan and Reuters.
- Capacity utilization. The inflationary pressure of supply bottlenecks typically come after more than 80% of the nation’s production capacity is in use. It’s now at 78.3%.
- Unemployment. Usually, jobless rates lower than 7% set off wage pressures, which fuel inflation. The March unemployment rate was 7.6%. Unemployment has averaged about 5% at past market peaks.
Past bull markets have ended when the Federal Reserve increased interest rates to try to put a brake on high inflation from rapid economic growth. But all signs now show the Fed continuing to stimulate the economy with low interest rates. Compared to last year, the Fed has doubled its long-term bond buying.
And other central banks are joining in, forming more of a unified global effort to keep rates low. The Bank of Japan has reduced interest rates, and the European Central Bank and some other central banks are stimulating their economies instead of sitting on the sidelines.
The big question is how much of the economic growth we’re seeing is from that monetary stimulus vs. organic growth, which is much more sustainable over the long term. What happens if organic growth hasn’t taken off and the GDP doesn’t get back to 2.5% and the Fed runs out of ammo? It’s pretty hard to answer that right now.
But you go down the list, and there’s very little now to compare to prior market peaks.
Instead of a speculative frenzy, we’re seeing investors flock to defensive stocks. Typically, at the top of a bull market, growth stocks you never heard of lead the market as well as small stocks you can’t even pronounce. So far this year, health care stocks and consumer durables – two of the most conservative sectors – have led the market.
I’m not saying there aren’t dark clouds on the horizon. There are plenty. What will take the market down may be events we can’t even speculate on. Of the eight major sell-offs since I started in 1975, nobody called four of them. That’s why we still stick with balanced accounts.
We’ve come a long way. Both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index recently set record highs. The S&P 500 rose 10% in the first quarter. Yes, we’re getting close to the point at which bull markets on average have run their course. But the factors that typify the end of a bull market aren’t there now.
The past three Aprils we’ve experienced stock market corrections ranging from 10% to nearly 20%. And we’re likely to have a pullback this spring. But it’s unlikely to be more than just a readjustment as the bull marches on.
Bob Landaas is president of Landaas & Company.
(initially posted April 4, 2013; revised April 5, 2013)