AS BULL TURNS 8, EXPECT MORE MUTED GAINS
With market pricey from valuation standpoint, future appears less robust
In the rodeo world, bucking bulls and their riders have to make their mark in eight seconds. Wall Street’s stock market bull and the investors who have hung on during its wild ride have made their mark by lasting eight years.
The second-longest bull market in U.S. history has nearly quadrupled the value of the Standard & Poor’s 500 stock index. But its strength has also caused valuations for stocks to swell nearly 30% higher than historical averages. And that has jittery investors wondering what’s next for the aging bull.
The Cliffs Notes version goes like this: It began March 9, 2009, after the worst stock plunge since the Great Depression. It was nurtured by the nation’s central bank, which powered it with steroid-like stimulus injections in the form of cheap money. It overcame obstacles ranging from debt crises in Europe to natural disasters. It persisted through wars, terror attacks, a U.S. government shutdown, a downgrade of the nation’s AAA credit rating and countless political scares. It also survived the start of an interest-rate-hike cycle in late 2015 by the Federal Reserve, the same central bank that had sustained it with a low interest-rate policy.
At the S&P 500’s closing high last Friday, the index had climbed 254% since March 2009. So, should you keep riding what David Rosenberg of investment firm Gluskin Sheff calls a “momentum-driven” bull? Or should you jump off before it damages your portfolio and psyche?
There are reasons to embrace the bull and fear it, Rod Smyth, chief investment strategist at Riverfront Investment Group, told clients recently.
The case for stock prices going higher is based on investors’ confidence the economy will continue to get better and companies will post bigger profits. Smyth said the market could get a lift from people diverting more of their available dollars into the stock market.
Aside from stocks trading near record levels, Rosenberg said the argument for the market hitting turbulence includes stock valuations at 15-year highs, signs that investors are too giddy and retail investors jumping back into the market since Donald Trump was elected president and investing “almost $80 billion” in U.S.focused stock funds.
“Our advice,” Smyth said, “is to ride the bull but not to chase it.” In layman’s terms, that means if you are in the market, continue to follow your financial plan, but don’t plow every cent of your cash into what is a pricey market.
“Our advice is to ride the bull but not to chase it.” Rod Smyth, chief investment strategist at Riverfront Investment Group