Is the current stock market a raging bull or an aging bull? There is certainly no doubt that it is a bull market. Since the S&P 500 sank to 676.53 in March of 2009, it has slightly more than tripled. A rally toward the end of the quarter kept the S&P 500 growth streak going at nine straight quarters.
The NASDAQ and Dow are continuing to flirt with record territory as well, although both ended the quarter on a slight down note. The NASDAQ pushed past the 5,000 mark in March for the first time since March of 2000, and while it closed the quarter below 5,000, the record of 5,132.52 is still within reach. Similarly, the Dow Jones Industrial Average broke the 18,000 barrier in February and has crossed over the mark several times since then, finishing at 17,776.12 for the quarter.
The bull market has persisted through plenty of potential minefields including geopolitical tensions in the Middle East and the Ukraine, economic slowdowns in Europe and Japan, an overly strong dollar, a domestic debt crisis, and a collapse in oil prices (good for consumers, but usually bad for markets). What factors have kept the market going for so long?
- Federal Reserve Policy – The Fed’s policy of bond-buying stimulus and near-zero interest rates made stocks an attractive investment option. The average dividend yield of the S&P 500 is currently 1.91%, while the ten-year Treasury note, the standard of safe bond investments, closed at 1.94%. By investing in stocks, you are getting nearly the same yield with potential growth that bonds cannot offer.
- Frequent Minor Adjustments – All the different possible pitfalls has dampened the potential for runaway enthusiasm (or as former Fed Chairman Alan Greenspan put it, “irrational exuberance”). Expectations of an interest rate rise and other occasional negative indicators have kept the market periodically regulating itself while generally avoiding the 10% loss that defines a correction. The Fed has been particularly deft at keeping expectations reasonable despite intense analysis of all their actions.
- Lack of Inflation – Inflationary pressures that could squash stock market rallies simply do not exist right now, and some economists are concerned about potential deflation. The economy is not expanding fast enough to increase inflation sharply, and future interest rate rises will curb any inflationary pressures that do occur.
- Company Earnings – Even though stocks have risen, they have not outpaced corporate earnings so far. Earnings have been healthy enough to keep price–to-earnings (P/E) ratios in line. However, expectations for first quarter earnings for 2015 have been seriously downgraded over the last few weeks due to energy/oil stocks and the strong dollar.
While this is an aging bull, it is only the fourth-oldest bull market since World War II. S&P Capital IQ notes that since that time there have been a total of twelve bull markets averaging 58 months. This market still has a long way to go to meet the bull market of the 1990’s that came close to spanning an entire decade (113 months).
If history is any indication, things bode well for at least the next quarter. In the past three bull markets that had nine straight quarters of S&P 500 growth, the tenth quarter continued the pace with an 8.1% average growth. Even with interest rate rises on the horizon, the bull market appears to have room to grow — although given the projected relatively slow GDP growth, grim earnings predictions, and the worldwide economic slowdown, this bull market is more likely to show age than rage.