Is the Longest Bull Market in U.S. History Getting Old?
Wall Street just celebrated the longest bull market in U.S. history on March 9. The big question now is, will stocks continue to trend higher and will the bull market continue, or is it on its last legs? For the most part, bull markets don’t just “end” because they are old. Bull markets die when the economy falls into a recession. And right now, the U.S. economy is on solid footing. That said, the global economy is getting weaker, which could impact U.S. growth. On top of that, U.S. stocks remains seriously overvalued. Even a short-term swoon could result in a massive short-term sell off.
On Friday, March 6, 2009, the S&P 500 hit an intra-day low of 666.79. On Monday, March 9, stocks hit bottom, when the markets closed at closed 672.88. It was the worst bear market since the Great Depression.
It’s been uphill since then. The S&P 500 is up more than 315%; the Dow Jones has soared almost 300%, and the Nasdaq is up roughly 500%. Over the same time frame, the TSX advanced 115%.
If you were able to, somehow, time the market perfectly, and invested $100,000 on March 9, 2009, in a broad stock index fund, today, that investment would be worth more than $406,000. Since 2009, the market has averaged a 17.6% annualized return. This is significant when compared to historical annual growth of around 10%.
What precipitated these massive gains? To help kick start the economy, the U.S. Federal Reserve artificially lowered interest rates to near zero. This made borrowing cheap. It also decimated fixed income investments. Where were yield hungry investors to turn? The stock market.
Despite the fact that economic data was underwhelming and publicly traded companies in Canada and the U.S. were reporting weak financial results, investors sent stock prices higher and higher.
Stocks weren’t rising because corporate American and Canada were reporting great results. They were rising because of the low interest rate environment. This sent valuations into nosebleed territory.
Over the last couple of years, the U.S. economy has improved and companies are reporting solid earnings growth. And once again, investors are rewarding these stocks with higher share prices. Which is what happens when you report good financials. But those recent gains are now on the backs of dubious gains from desperate investors in the early years of the bull market.
The U.S. economy is doing well (the Canadian economy meanwhile expanded at just 0.1% in the fourth quarter) but stock valuations remains extremely elevated.
The Case Shiller CAPE (cyclically adjusted P/E) ratio currently stands at 30.32 times average earnings. The long-term norm is 16. This implies that stocks are overvalued by 89.5%.
The ratio has only been higher twice: during the dotcom bubble from 1998 to 2001 and Great Depression. In December 1999, the ratio hit 44.20. In September 1929, the ratio hit a high of 32.56.1
This doesn’t mean that the current bull market is going to end overnight, but history does show that it never ends well for stocks when they’re this overvalued.
And there are some signs that the bull market is getting weary. The S&P 500 hasn’t notched up a record close since September. Most bull markets also historically only last for around a decade.
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- “Case Shiller P/E Ratio,” Yale University, last accessed March 11, 2019; http://www.econ.yale.edu/~shiller/data.htm
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