As the U.S. stock market moves towards its 5th anniversary off the March 2009 bottom and we break all-time highs seemingly every week, I wanted to share some of my thoughts. Using S&P500 Index historical total return data1 there have been 12 bull markets since the 1930’s. The industry standard definition of a bull market is a gain of 20% off its low over a period of at least 6 months.
Today’s bull market is in its 57th month which puts it close to average from a historical perspective. Its total return from the 2009 low to today is 167%. This is close to the average bull market gain of 185% since the 1930’s. However, the rate of gain per month is 2.9% which ranks it 3rd best since the 1950’s. The only faster pace has been the bull market leading up to the ’87 Crash and the tech driven bull market of the late 90’s which ended with the dot.com crash in 2000.
With low-moderate U.S. growth, low inflation, low (but rising) relative interest rates, improving housing market, lower energy prices and an accommodative Federal Reserve, we believe the current bull market may continue and stocks can continue to gain (albeit more modestly).
There are increasing signs, however, of a “cap” on returns which we continue to monitor. Moderating US company revenue growth (top line) combined with exceptionally high profit margins (bottom line) might possibly lead to disappointment if expectations remain high. Margin debt is high which historically has been a market-top signal. Mutual fund flows have turned very positive in the last 2 months as previously side-lined investors have begun to enter the US equity market. The “herd” mentality of individual investors is well documented to be a contrarian signal. Bear market sentiment is low which is another historically contrarian indicator.
While there are clearly growing “signals” of a correction, there are no hard and fast rules for predicting when one will occur. We haven’t suffered a 10% correction since August 2011. On average, 10% corrections occur every 30 months, but during the last bull market (2003-2007) there weren’t any and there were also none during the 1990-1997 bull market run.2
At Clearview Wealth Management, we actively re-balance our clients back to their asset allocation targets. We believe that is the only way to effectively take the guess work out of trying to time when bull and bear markets might start and end. While we do not know when the next market correction will be, one thing we know for certain is that we will have other market corrections at some point in the future, and when they occur we’ll use the opportunity to buy great companies at better prices.
1[David Larrabee, CFA of the CFA Institute]
2[Bespoke Investment Group]