The bull market at 10: When will it end?
Mixed economic picture has economists divided
Wall Street debates whether winning run is ending or getting a second wind
As the longest bull market in U.S. history celebrates its 10th anniversary Saturday, Wall Street pros are debating whether the old-timer is on its last legs or mustering a second wind.
The question is pivotal for the 401(k) plans and other investments of millions of Americans who have built robust nest eggs on the back of the market’s impressive rise.
“Bull markets don’t die of old age,” says Jason Ware, chief investment strategist and chief economist of Albion Financial. “I see no reason the bull market should abruptly end as long as the economy stays out of recession” and the Federal Reserve doesn’t excessively raise interest rates.
Others are more skeptical. “It’s a late-stage market with one last rally in it,” says Jared Woodard, global investment strategist for Bank of America Merrill Lynch. He expects the stock market to reach new highs this year before petering out by 2020 on lower corporate earnings or higher inflation and interest rates.
A bull market is generally defined as a sustained rise in stock prices without a 20 percent drop from its peak – or bear market – based on closing prices. Since the Standard & Poor’s 500 stock index bottomed out at 676.53 on March 9, 2009, in the thick of the Great Recession and financial crisis, it has more than quadrupled.
If you were daring enough to invest $100,000 in a broad stock index fund on that dark day 10 years ago, your investment would be worth $406,327 today. The market has averaged 17.6 percent annualized returns year during that period, compared with a historical average of about 10 percent.
This bull topped the 1990s rally as the longest last August.
After months-long, stomach-churning turbulence, the bull nearly met its demise Christmas Eve when the S&P 500 was down 19.8 percent from its lateSeptember record of 2,930.75. Investors were spooked by the Fed’s plan to raise interest rates twice more this year (after nine hikes since late 2015), President Donald Trump’s trade war with China, a slowing global economy and the fading effects of federal tax cuts and spending increases.
But after coming within a whisker of a bear market, stocks have mounted a rousing comeback since Fed Chairman Jerome Powell and other central bank officials reversed course and suggested they may not lift rates at all this year if inflation remains subdued. The broad market index is up 17 percent from its recent low but still 6.3 percent off its peak.
Over the past decade, the bull market has also weathered European debt crises, a downgrade of the U.S. credit rating, an oil price crash, devastating hurricanes and threats of nuclear war.
Why has bull lasted so long?
Stocks tumbled so low – on March 9, 2009, the S&P 500 was 57 percent off its prior peak – they had nowhere to go but way, way up.
“There was a lot of catching up to do,”
says Yung-Yu Ma, chief investment strategist of BMO Wealth Management. The benchmark stock index, in fact, didn’t even claw its way back to its previous high until 2013.
The market also has benefited from a “not too hot, not too cold economy,” Ware says.
Economic growth averaging a modest 2.2 percent a year has helped contain inflation, allowing the Fed to keep short-term rates low and buy bonds that slashed long-term rates on mortgages and other loans.
Low rates coax investors to move their money to higher-yielding stocks and spur more borrowing and economic activity.
Tame inflation also means businesses pay less for labor and materials, widening their profit margins.
At the same time, the market run-up has been devoid of the kind of risk-taking that led to the 2000 dotcom bubble and the 2007 housing crash, both of which were followed by market downturns and recessions, Ware says.
Another boost: Businesses were cautious after the bruising recession of 2007-09, limiting hiring, employee raises and capital investment. That helped fatten their annual earnings gains to an average 12 percent the past decade, above the 5.5 percent historical average, Ware says.
Instead, public companies have spent billions of dollars buying back their own stock, a strategy that pushed share prices even higher. S&P 500 companies have made a record $600 billion in buybacks the past five years, Woodard says.
Will the good times continue? Here’s why some analysts think this bull has further to run.
Economy is still on even keel
While growth picked up to nearly 3 percent in 2018 on the federal stimulus, it’s expected to slow this year. More importantly, inflation remains below the Fed’s annual 2 percent target, letting the central bank keep interest rates low.
The economy should also continue to dodge the “boom and bust moments” that are a recipe for bear markets and recessions, Ware says.
Fed to the rescue
The Fed breathed new life into a sputtering market when it made its big about-face and said it will be “patient” on rate hikes this year. The central bank also said it expects to stop shrinking its $4 trillion portfolio of bonds earlier than anticipated this year, a move that should keep long-term rates lower.
“We were very bearish with the Fed (planning to raise rates),” Woodard says. “We turned tactically bullish” after the Fed’s turnabout, at least for 2019.
Market drop bought the bull more time
The plunge in stocks last fall was nerve-wracking, but it likely extended the bull’s lifespan by rinsing the market of investors bent on making a quick buck and leaving more long-term shareholders focused on company fundamentals.
“It wrings out the excesses,” Ware says.
Stocks still reasonably priced
Despite the market run-up, the average S&P 500 stock is priced at 16 times projected earnings over the next 12 months, down from a multiple of 18 in late 2017 and slightly below the fiveyear average, according to FactSet.
“The stock market is cheap,” Ware says, especially with low interest rates making shares of companies more appealing.
But wait. Here’s why some analysts think a bear market lurks by next year:
Wages could squeeze profits, goose inflation
Average annual pay increases have picked up to more than 3 percent as employers bid up to attract fewer available workers amid 4 percent unemployment. That’s good for workers, but it will likely mean narrower corporate profits that crimp stock gains or contribute to losses if raises accelerate further, as expected, Woodard says.
S&P 500 earnings gains are expected to slow to 4.5 percent this year, according to FactSet. Morgan Stanley expects earnings to contract.
Alternatively, Woodard says, companies could pass along their higher labor costs to consumers through higher prices, juicing inflation and forcing the Fed to raise rates more aggressively. That, too, could be a bull-market killer.
Fading effects of tax cut
The big corporate tax cut accounted for about a third of the 20 percent-plus growth in corporate profits the first three quarters of last year, Ware says. But since the lower tax rate is now part of baseline earnings, it won’t goose profits this year.
Recession odds are rising
More than half the economists surveyed by The Wall Street Journal in early January predicted a recession will start in 2020. A downturn is almost always accompanied by a bear market. The market rally has soothed nerves, but many economists still foresee a slump next year.
Trade fight lingers
Trump administration officials are reportedly close to a deal with China to roll back most tariffs on both sides. But Ma of BMO Wealth Management says a deal is already priced into stocks. Meanwhile, any agreement is likely to include provisions that would reinstate tariffs if China doesn’t meet certain conditions, Ma says.
That, he says, would leave a cloud of uncertainty over the market.