How Long Can This Bull Charge Along?
While we continue to prosper from this bull market in equities, it is important to consider the longevity of a continued rise in stocks prices. There is one thing we know for certain: stock prices do not trend upward forever. We also know that when equity prices trend downward, it usually happens when most investors least expect it and does so quickly and dramatically. It is in this spirit that we thought we would share some insight on the age and health of this bull market and where the opportunities and risks may be as we look towards 2019.
Bull Market Longevity
Most investors believe that the bull market is the longest in history. As you know, we view it differently. Our research suggests that the bull market which began in 2009 ended in 2015-16 when markets declined 20% not once, but twice, and the global economy suffered through a mild corporate profit recession. When viewed from our perspective, we are approaching the fourth year of the bull market that began in mid-2016. In terms of the average bull market life cycle, this one would be considered middle aged (over the past 50 years bull market cycles have averaged 7 years). This bull market is not as vigorous as its younger self (2016-17), which is to be expected, but recent economic and corporate profitability data suggest steady growth going forward.
In terms of return, this bull market has delivered returns of over 60% for investors since its inception. While one might think “that’s all that’s left,” we remind you that bull markets often deliver returns in excess of 100% during their lifecycle – another sign that there may be more upside in our future.
During the late stages of economic cycles, growth is often trending sideways or less vigorously. Today we continue to experience better than expected economic and corporate profit growth. During the second quarter 66% of companies beat earnings estimates. Think of the global economy as a giant cargo ship – once it has momentum it takes time to slow it down or bring it to a halt.
Lastly, bull markets usually “meet their maker” when price earnings ratios (P/E ratios) are excessive and have risen beyond the underlying growth of the companies or indexes they represent. Currently markets trade at a P/E ratio of 17.5 – not what we would consider overvalued or typical of the onset of a major market decline.
Opportunities and Pitfalls – A Bull with Different Stripes
Though this bull market may not be close to its end, we do believe that it will change over the next few quarters and investors should be prepared. Over the past year some of the best market performance has been in technology, financial, industrial and material sectors. This leadership has already begun to fade and may be superseded by sectors such as consumer staples and healthcare, which include some of our favorite companies that deliver consistent growth.
Similar to the changes in sector leadership, we also see changes in our global exposure in the future. We continue to believe that investing globally will add more value than a domestic-only strategy. However, as recent and significant declines in Argentina, Turkey and China show us, investors need to be agile in their international exposure.
Though we continue to be optimistic in our view of the global economy and bull market currently, we recognize a few things: 1) There will be corrections of 8-10% along the way (maybe we are overdue for one?) 2) Something could occur to de-rail the healthy fundamentals and our outlook. In terms of this last point we always remind ourselves that we are dealing with the known, and the unknowable. Therefore, we will continue to use our Active Risk Management process to fend off the possibility of catastrophic decline. As you know, this is a process of managing your allocation to stocks, your sector exposure and the use of carefully placed stop loss orders on those companies that are economically sensitive or have significant business risks.
All of us here on the team hope you enjoyed your summer. If you have any questions about your portfolio or have experienced any significant changes in your finances please let us know.
Thank you for your continued confidence in our work. If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.
Your Team at Main Street Research