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March 14, 2015

Bull Markets Never Die, They Just Fade Away

The bull market celebrated its sixth birthday on Monday. The milestone put the rally in an unusual club. Since World War II, only three other bull markets made it to year six, according to Sam Stovall at S&P Capital IQ. Just two made it to year seven: June 1949 through August 1956 and October 1990 through March 2000. Seven other bull markets ended before year six.
I would refrain from jumping to any conclusions based on these numbers. Stovall says previous post-WWII bull markets have lasted between 1.1 years (May 1947 through June 1948) and 9.5 years (October 1990 through March 2000). Plus, the sample size is small, at just 11 sustained rallies.
Prevailing valuations, though not cheap, may not be a reliable indicator of whether or not the current bull market reaches year seven. Past bull markets have ended with trailing price-earnings ratios varying between 8.8 (1980) and 27.0 (March 2000), according to Stovall. As of yesterday’s close, the S&P 500 is trading at 17.3 times 2014 earnings. Five bull markets have ended at higher price-earnings ratios, with a sixth ending with a P/E of 17.2.
Robert Shiller’s cyclically adjusted price-earnings (CAPE) ratio is at an unusually high level of 27.85 (as of February 24, 2015). Only one of the 11 previous bull markets had a higher CAPE: October 1990 through March 2000. Notably, the CAPE reached 27.72 in December 1996 and kept climbing from there (although not continuously). In other words, even with high valuations, it is still possible for another candle to be added to a bull market’s birthday cake.
Treasury yields are not of much help either. Previous post-WWII bull markets have not seen the level of monetary stimulus that has been provided over the past several years. They also have not enjoyed the low Treasury bond yields for the most part. Stovall says only the May 1947 through June 1948 and the June 1949 through August 1956 bull markets ended with the benchmark 10-year Treasury note yielding 3% or less. Yields on the benchmark Treasury note were higher throughout the other nine previous WWII bull markets.
Periods of restrictive monetary policy have been associated with worse stock market performance relative to periods of loose monetary policy. (A new article about the impact of different monetary environments is scheduled for the April AAII Journal.) But it is important to maintain perspective in the face of all of the scuttlebutt. The first rate hike could be by just 25 basis points and it is unclear how many will follow. Even if the target for the Fed funds rate is hiked by a full percentage point (and the timing, magnitude and number of future rate hikes remains uncertain), it would still be just 1.25%—a low level by historical standards.
Are there other monsters that could come out from underneath the bed and spook Mr. Market? Absolutely. A partial list includes a deceleration of economic growth, higher inflation, global economic repercussions caused by problems in Europe and/or China and greater geopolitical instability. I’m sure some of you can add to this list. Yet it’s hard to pinpoint a time when there weren't proverbial monsters hiding under the bed. There is always something that can go bump in the night, and stocks have risen over the long term nonetheless.
In writing this week’s commentary, I took a look at what I wrote about the bull market’s fifth birthday a year ago. Since the concluding remarks I gave in March 2014 are still valid today, I’m going to recite them:  Control what you can control and don’t worry about the rest. You can control your ability to ensure that your allocations match your long-term goals and not your short-term expectations. You can’t control whether stock prices or interest rates will rise or fall in the future. Most importantly, consider that even if your short-term timing is terrible and you get into the stock market at a time like January 2000 or January 2007, you will likely still do better by staying invested no matter what the market does.
The Week Ahead
Dow component Nike (NKE) will report earnings on Thursday. Joining it will be about 10 other members of the S&P 500, including Adobe Systems (ADBE) and Oracle (ORCL) on Tuesday, FedEx (FDX) on Wednesday and Lennar (LEN) on Thursday.
The Federal Open Market Committee (FOMC) will hold a two-day meeting, starting on Tuesday. The meeting statement will be released on Wednesday at 2:00 p.m. Eastern time followed by a press conference with Fed chair Janet Yellen at 2:30 p.m. Elsewhere on the economic front, February industrial production and capacity utilization, the National Association of Home Builders March housing market index and the March Empire State manufacturing index will be released on Monday. Tuesday will feature February housing starts and building permits. The March Philadelphia Federal Reserve survey will be released on Thursday.
Two other Federal Reserve officials will make public appearances. Atlanta president Dennis Lockhart and Chicago president Charles Evans will both speak on Friday.
The Treasury Department will auction $13 billion of 10-year inflation-protected securities (TIPS) on Thursday.
Friday will be a quadruple witching day, which means both option and future contracts will expire.
On a lighter note, Pi Day of the Century will occur this Saturday, March 14, specifically at 9:26:53 a.m. This date and time (3-14-15 9:26:53) corresponds with the first 10 unrounded digits of pi in perfect order: 3.141592653. A slice of pie is recommended for celebrating it.
Tuesday is St. Patrick’s Day. Be sure to wear something green.
About The Author - Charles Rotblut, CFA is  the VP and Editor for American Association of Individual Investors (AAII).  Charles is also the author of Better Good than Lucky.  (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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