The bull market celebrated its sixth birthday on Monday. The milestone put the rally in an unusual club. Since World War II, only three other bull markets made it to year six, according to Sam Stovall at S&P Capital IQ. Just two made it to year seven: June 1949 through August 1956 and October 1990 through March 2000. Seven other bull markets ended before year six.
I would refrain from jumping to any conclusions based on these numbers. Stovall says previous post-WWII bull markets have lasted between 1.1 years (May 1947 through June 1948) and 9.5 years (October 1990 through March 2000). Plus, the sample size is small, at just 11 sustained rallies.
Prevailing valuations, though not cheap, may not be a reliable indicator of whether or not the current bull market reaches year seven. Past bull markets have ended with trailing price-earnings ratios varying between 8.8 (1980) and 27.0 (March 2000), according to Stovall. As of yesterday’s close, the S&P 500 is trading at 17.3 times 2014 earnings. Five bull markets have ended at higher price-earnings ratios, with a sixth ending with a P/E of 17.2.
Robert Shiller’s cyclically adjusted price-earnings (CAPE) ratio is at an unusually high level of 27.85 (as of February 24, 2015). Only one of the 11 previous bull markets had a higher CAPE: October 1990 through March 2000. Notably, the CAPE reached 27.72 in December 1996 and kept climbing from there (although not continuously). In other words, even with high valuations, it is still possible for another candle to be added to a bull market’s birthday cake.
Treasury yields are not of much help either. Previous post-WWII bull markets have not seen the level of monetary stimulus that has been provided over the past several years. They also have not enjoyed the low Treasury bond yields for the most part. Stovall says only the May 1947 through June 1948 and the June 1949 through August 1956 bull markets ended with the benchmark 10-year Treasury note yielding 3% or less. Yields on the benchmark Treasury note were higher throughout the other nine previous WWII bull markets.
Periods of restrictive monetary policy have been associated with worse stock market performance relative to periods of loose monetary policy. (A new article about the impact of different monetary environments is scheduled for the April AAII Journal.) But it is important to maintain perspective in the face of all of the scuttlebutt. The first rate hike could be by just 25 basis points and it is unclear how many will follow. Even if the target for the Fed funds rate is hiked by a full percentage point (and the timing, magnitude and number of future rate hikes remains uncertain), it would still be just 1.25%—a low level by historical standards.
Are there other monsters that could come out from underneath the bed and spook Mr. Market? Absolutely. A partial list includes a deceleration of economic growth, higher inflation, global economic repercussions caused by problems in Europe and/or China and greater geopolitical instability. I’m sure some of you can add to this list. Yet it’s hard to pinpoint a time when there weren't proverbial monsters hiding under the bed. There is always something that can go bump in the night, and stocks have risen over the long term nonetheless.
In writing this week’s commentary, I took a look at what I wrote about the bull market’s fifth birthday a year ago. Since the concluding remarks I gave in March 2014 are still valid today, I’m going to recite them: Control what you can control and don’t worry about the rest. You can control your ability to ensure that your allocations match your long-term goals and not your short-term expectations. You can’t control whether stock prices or interest rates will rise or fall in the future. Most importantly, consider that even if your short-term timing is terrible and you get into the stock market at a time like January 2000 or January 2007, you will likely still do better by staying invested no matter what the market does.
- Don’t Fight the Fed: Interest Rates and Their Impact on the Stock Market – Sam Stovall says the S&P 500 has historically risen after the start of a rate-hiking cycle, but typically at a lower-than-average rate of return.
- The Danger of Getting Out of Stocks During Bear Markets – Getting out of stocks out of fear over what might happen significantly hurts long-term wealth.
- Relative to 2009, How Has Your Investment Strategy Changed? – Tell us how your strategy has changed over the course of the current bull market on the AAII.com Discussion Boards.
My colleague, Wayne Thorp, will speak to our Southeast Florida Chapter in Delray on Tuesday and in Fort Lauderdale on Wednesday. Not in South Florida? Visit our redesigned Local Chapters page to find a meeting near you.
Dow component Nike (NKE) will report earnings on Thursday. Joining it will be about 10 other members of the S&P 500, including Adobe Systems (ADBE) and Oracle (ORCL) on Tuesday, FedEx (FDX) on Wednesday and Lennar (LEN) on Thursday.
The Federal Open Market Committee (FOMC) will hold a two-day meeting, starting on Tuesday. The meeting statement will be released on Wednesday at 2:00 p.m. Eastern time followed by a press conference with Fed chair Janet Yellen at 2:30 p.m. Elsewhere on the economic front, February industrial production and capacity utilization, the National Association of Home Builders March housing market index and the March Empire State manufacturing index will be released on Monday. Tuesday will feature February housing starts and building permits. The March Philadelphia Federal Reserve survey will be released on Thursday.
Two other Federal Reserve officials will make public appearances. Atlanta president Dennis Lockhart and Chicago president Charles Evans will both speak on Friday.
The Treasury Department will auction $13 billion of 10-year inflation-protected securities (TIPS) on Thursday.
Friday will be a quadruple witching day, which means both option and future contracts will expire.
On a lighter note, Pi Day of the Century will occur this Saturday, March 14, specifically at 9:26:53 a.m. This date and time (3-14-15 9:26:53) corresponds with the first 10 unrounded digits of pi in perfect order: 3.141592653. A slice of pie is recommended for celebrating it.
Tuesday is St. Patrick’s Day. Be sure to wear something green.
- Converting to a Roth IRA Can Minimize RMDs
- High Buyback Yields
- The Cash Flow Statement: Tracing the Sources and Uses of Cash
Neutral sentiment surged to a level not seen since last May in the latest AAII Sentiment Survey. The rise in neutral sentiment occurred as bullish sentiment fell to its lowest level since last summer.
Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 8.2% percentage points to 31.6%. This is the lowest level of optimism since August 7, 2014 (30.9%). The drop puts bullish sentiment below its historical average of 39.0% for the first time in five weeks and just the fifth time in 31 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, jumped 6.2 percentage points to 43.0%. Neutral sentiment was last higher on May 22, 2014 (43.2%). The rise puts neutral sentiment above its historical average of 30.5% for the 10th consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 2.1 percentage points to 25.4%. Though at a five-week high, pessimism remains below its historical average of 30.5% for the fifth consecutive week and the 43rd out of the past 52 weeks.
Bullish sentiment has declined by a cumulative 15.4 percentage points since reaching a near-term high of 47.0% on February 19, 2015. Over the same period, neutral sentiment has risen by a cumulative 7.9 percentage points and bearish sentiment has risen by a cumulative 7.5 percentage points. The rebound in pessimism is occurring after bearish sentiment had fallen to an unusually low level of 17.9% on February 19, 2015.
Neutral sentiment is now at an unusually high level, meaning it is more than one standard deviation above its historical average. Unusually high levels of neutral sentiment have historically been associated with better-than-average market performance over the preceding 26- and 52-week periods. (See Analyzing the AAII Sentiment Survey Without Hindsight in the June 2014 AAII Journal for more information.)
The change in sentiment is occurring as the S&P 500 has pulled back from its recent highs. Though jitters about the Federal Reserve raising interest rates sooner rather than later have impacted stock prices, when asked two months ago, AAII members expressed mixed opinions about how the market would react to the first rate hike. More than 40% said they expect stock prices to fall in reaction to the announcement of the first rate hike, though about half of these respondents also predicted that the decline will be temporary.
Also weighing on AAII members’ short-term market outlooks are prevailing valuations, disappointing earnings or guidance from certain companies, geopolitical events, the pace of economic growth and worries that an even larger decline in stock prices could occur. Keeping some AAII members encouraged is the overall upward momentum of stock prices, sustained economic expansion, earnings growth and an accommodative monetary policy.
This week’s special question asked AAII members whether it is likely or unlikely that the current bull market will last into at least a seventh year. Half of all respondents said the bull market is likely to continue into a seventh year. An additional 11% of respondents think the odds of the bull market reaching a seventh year are somewhat likely. Reasons given for the upbeat outlook varied (earnings growth, price momentum, valuations, sentiment, etc.), though several respondents cited economic growth, accommodating monetary policy and the attractiveness of U.S. stocks relative to other investment options as influencing their outlook.
At the other end of the spectrum, 15% of respondents said it is unlikely and an additional 17% said it is somewhat unlikely for the bull market to last another year. Tightening monetary policy was the primary explanation given, followed by valuations. Other reasons included the possibility of stronger international markets attracting investment dollars, the stronger dollar and the length of the current bull market.
Here is a sampling of the responses:
- “It is likely to happen as other alternatives (bonds, CDs, cash, etc.) offer far worse returns.”
- “Somewhat likely provided that interest rates stay low and employment improves.”
- “Somewhat unlikely since the Fed will probably begin raising rates in the next few months.”
- “Unlikely. P/E ratios are getting frothy.”
- “Very likely. The economy will continue to grow.”
Bullish: 31.6%, down 8.2 points
Neutral: 43%, up 6.2 points
Bearish: 25.4%, up 2.1 points
Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%
Local Chapter Meetings
March 5, 2015 Lessons from Buffett’s 50 Years at Berkshire-Hathaway
February 26, 2015 A Reignited Debate About Protecting Investors
February 19, 2015 Winning the Game of Finance
February 12, 2015 The Mutual Fund Traits That Matter
