Since March of 2009, we have been in the second-longest bull market in history as measured as a stretch of time without at least a 20% drop in the S&P 500. (1) If you measure it by expansion, it is the third-longest in history. (2)
Because things have been looking up for so long, there have been a lot of predictions of recessions and corrections over the past couple of years. After all, though the market historically rises two-thirds of the time, (3) everyone knows that the stock market can’t just keep going up forever. The cyclical nature of the market guarantees a slowdown at some point, the big question is when.
Forces Driving the Bull Market
You can’t simply use time as a reason to say the bull market has reached its peak. You must look at the underlying factors that drive the market. And there are a lot of economic factors that remain positive. These include:
- Unemployment is near record lows at 4.1%. (4)
- US GDP was growing at a rate of about 3% for most of 2017. (5)
- Global economies are growing, and global stocks remain strong, with the MSCI in 2017 experiencing the first year on record to see positive gains every single month. (6)
- Earnings are up, fueled by the energy sector that is rebounding from the 2015 global oil glut. (7) (8)
- In 2017, the market saw record-low volatility.
- Though the Fed and other central banks are raising rates, they are doing so very slowly due to low inflation. (9)
Signals That the End Is Near
Not everything is looking positive for the future of the bull market, though. There are signals, though at times subtle, that the end is near.
One clue is that individual investors are plowing five times more capital into stocks than they are into cash. There hasn’t been a stock-to-cash ratio like the one we are seeing today since the lead up to the dotcom crash. This can be dangerous and leads to market overvaluation.
Many analysts worry that market values are too high. The S&P 500 is at historical highs while its price-earnings ratio is 50% higher than its historical average. (10) When compared to earnings growth, market performance far surpasses what would be expected if it were dependent on earnings. Market valuations are at 1990’s levels, (11) which should be a warning sign.
Another red flag is that the yield on 2-year Treasuries now tops the dividend yield of the S&P 500. This could signify that investors have been pushed into riskier stocks as they seek out yield. We could see a shift from stocks to bonds as investors discover they can face less risk for the same reward.
The yield curve is also flattening. November saw the first time in 10 years that the spread between the 2-year and 30-year yields fell below 1%. A flattening yield curve is traditionally a sign that the economy is about to slow down. (12)
While consumer confidence is up, savings rates have fallen. While this inversion of cash into the economy may give an immediate boost, it’s usually not a good sign long-term. Historically, when such a gap between confidence and savings rates has occurred, it ended up having a negative effect on consumption and, therefore, the economy. (13)
In addition to these economic warnings signs, the market is also influenced by non-economic factors. In the coming year, the market could take a hit from any number of outside factors, such as nuclear war with North Korea, natural disasters, elevated trade protectionism, or political scandals.
What You Should Do
So, is this the top? Though there are some signs that it could be, there’s no way to know for sure. Instead of trying to time the market, it’s best to have a well-disciplined long-term plan for your investments. At HBA Wealth, we advocate for tried-and-true practices such as diversification and periodic rebalancing instead of gambling with market timing.
With the tenure of the current bull market in question, it’s important to review your portfolio to ensure that you are prepared for whatever 2018 has in store. If you would like a professional review of your portfolio to make sure you are properly diversified, and your risk doesn’t exceed your comfort level, contact me at (626) 529-8347 or email me directly at ricky@hbawealth.com. I can help you develop an investment plan that will help you achieve your goals no matter happens next to the market.
About Haydel, Biel & Associates
Haydel, Biel & Associates, an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.
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(1) https://www.cnbc.com/2017/09/13/second-longest-bull-market-ever-aging-gracefully-but-investors-wonder-how-long-it-will-last.html
(2) http://www.valuewalk.com/2017/12/sp-500-longest-bull-market/
(3) https://www.kiplinger.com/article/investing/T052-C007-S001-how-much-longer-can-the-bull-market-last.html
(4) https://www.bls.gov/news.release/pdf/empsit.pdf
(5) https://tradingeconomics.com/united-states/gdp-growth
(6) https://www.schwab.com/resource-center/insights/content/market-perspective
(7) http://www.trpropresearch.com/pdf/This_Week_In_Earnings.pdf/
(8) https://commercial.jpmorganchase.com/pages/commercial-banking/executive-connect/forces-bull-market
(9) https://www.wealthprofessional.ca/news/three-factors-driving-the-current-bull-cycle-232193.aspx
(10) https://seekingalpha.com/article/4122859-market-currently-overvalued
(11) https://seekingalpha.com/article/4122859-market-currently-overvalued
(12) http://www.valuewalk.com/2017/12/sp-500-longest-bull-market/
(13) https://www.schwab.com/resource-center/insights/content/market-perspective