Bull market still has a way to go to challenge No. 1
Now in seventh year and doubted from the start, it could challenge 1990s megabull for supremacy
Wall Street’s most-hated bull market could become its longest ever.
The No. 1-ranked 1990s megabull isn’t the only one that knows what it takes to live a long, profitable life. Today’s never-say-die bull — now the second longest at seven years and counting — has longevity genes, too.
And, if things go its way, the current bull market — which has powered the Standard & Poor’s 500 stock index to four consecutive days of record highs more than a year after its last peak — might challenge the record-setting ’90s rally that lasted 3,452 days before being snuffed out in early 2000 by the bursting of the Internet stock bubble.
To eclipse the 1990s bull market the current rally needs to go another 768 days — or two years and 38 days — without suffering a decline of more than 19.99% — just shy of a bear market.
Never say never, Wall Street pros say. This bull, despite expensive stocks, slowing global growth, a wobbly Chinese economy, less profitable U.S. companies and fallout from Britain’s vote to exit the European Union, continues to defy skeptics.
“I can’t say it will, but I will say it could,” Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, says of the current bull’s chance to outlast the nearly 10-year run from Oct. 11, 1990, to March 24, 2000.
“A lot has to go right,” adds David Joy, chief market strategist at Ameriprise Financial.
Agreed. But a lot went right for the ’90s bull. Recall that thenFederal Reserve chairman Alan Greenspan warned of investors being “irrationally exuberant” three-plus years before the stock market’s ultimate top.
The current bull, distrusted since it began in March 2009 after the worst stock plunge since the Great Depression, is 2,684 days young, S&P Dow Jones In- dices says. Not bad given that critics say its 220% gain has been artificially inflated by central bank stimulus and cheap-money policies. But this bull, despite the naysayers, could continue to exceed expectations.
“It has a chance if it doesn’t become overloved,” says Ann Miletti, lead portfolio manager at Wells Capital Management. She gives the current bull a “better than 60% chance” of one day becoming the longest ever. “It has been a slow growth market for a long time and a bumpy ride along the way. But that has also meant that expectations have remained tempered and valuations have been kept in check, which is a good setup for longevity.”
The subpar pace of U.S. growth since the end of the Great Recession seven years ago could also work in the bull’s favor, keeping the economy from overheating.
The run could go another eight to 13 years, says Brian Belski, chief investment strategist at BMO Capital Markets. He’s voicing short-term caution because the S&P 500 is trading about 3% above his year-end target of 2,100 but is sticking to his call for a “secular” bull market that could last a total 15 to 20 years.
Belski says improving U.S. business conditions will trump years of market “fear” driven by “emotions not analysis.” Cash, he says, is coming back to U.S. assets, including stocks, after years of money chasing commodities and emerging market investments. The great migration out of bonds and back into stocks has not occurred yet, but will, he predicts.
Belski is advising clients to position their portfolios for “what is coming next: a recovery in U.S. growth.” High-quality, brandname U.S. companies should do well, he says.
Wall Street skeptics and bears don’t buy it. It’s unlikely everything will go right for the market in the next two years and that it will be able to avoid a drop of
“In a fairy tale world, we will never have a bear market again. To me, this feels eerily like 2000.” Axel Merk, chief investment officer at Merk Investments
20%, counters Axel Merk, chief investment officer at Merk Investments. “In a fairy tale world, we will never have a bear market again,” Merk says. “To me, this feels eerily like 2000.”
But this time Merk’s concern centers around the U.S. government bond market, which is as pricey as it ever has been. Another concern: Many overseas sovereign bonds sport negative yields.
“We keep rationalizing why low to negative yields are appropriate, why this time is different,” Merk says. “In 2000, it took over three years after Greenspan’s warning of irrational exuberance until the markets caved.”
Also working against the bulls: U.S. stocks aren’t cheap. The S&P 500 is trading at 17 times estimated earnings for the forward four quarters, above the long-term average of around 15. Global economic growth is slowing. That means the economy and corporate earnings must rebound to justify the valuations, Joy says.
What else has to go right? The Federal Reserve, which has held off on interest rate hikes this year, must keep its word and avoid snuffing out the economic rebound or stock rally by hiking rates too far, too fast. The fallout from Britain’s vote to exit the European Union must be less onerous than feared. China’s economy can’t collapse. The world’s central bankers, which are nearly out of ammunition to fight the next downturn, can’t lose credibility with investors. And the U.S. presidential candidates also can’t keep saying things that spook markets.
Despite the risks, there’s a chance the bull can continue to skirt a drop of 20% or more. Working in the market’s favor, Wren says, is the fact few investors are in love with this rally.
“Normally these bull cycles end with a lot of enthusiasm and chasing by retail investors, but we are nowhere near that now,” Wren says.