The Oldest Bull Ever

This month, the U.S. stock market set a record for the longest bull market in history. How much longer can it continue?

The bull market, which celebrated its ninth birthday in March, began as America was shaking off the Great Recession. Initially fueled by the ultra-low interest rates set by the Federal Reserve Board, stocks included in the Dow Jones Industrial Index quadrupled in price over those nine years.

The Schiller CAPE Index.

More recently, tax reform and deregulation have been the catalyst, with higher stock prices reflecting higher profits, a growing economy, low unemployment, strong consumer spending and low inflation.

High Valuations

The downside, of course, is that nothing lasts forever. Some point to stock valuations being close to record highs as a sign that the bull may soon be gored. Others believe valuations are irrelevant and the record bull market will continue for some time yet.

As we’ve previously noted, the Schiller CAPE Index has been in the 95th percentile, meaning that stock valuations have almost never been this high, but we’ve also noted that the CAPE Index can be misleading. The CAPE Index is based on earnings over a decade, so it includes earnings from the end of the Great Recession, before the bull market began.

The CAPE Index has been above or close to the 95th percentile for years now — and yet the bull market continues.

However, Goldman Sachs Group Inc. analyzed 40 years of data and found that the valuation of the average stock in the S&P 500 is now in the 97th percentile of historically, although it reached the 99th percentile at one point last year before higher earnings brought the number down a bit.

There are also plenty of other ways to determine whether a market is likely to continue growing.

MarketWatch, for example, reported that, “The chart watchers said that the strength in the market’s breadth, as gauged by a record high in the S&P 500’s NYSE Composite Advance-Decline line last week, indicated that stocks have a long way to go before hitting a wall.”

MarketWatch quotes Stephen Suttmeier, a technical research analyst at Bank of America Merrill Lynch, as saying, “This suggests market rotation and not a market top. Given the debate about growth topping out relative to value, we find it interesting that the A-D line for both Russell 1000 Growth and Russell 1000 Value hit new highs last week.”

Then there’s the Dow Theory, which suggests that the market is strong and a bull market is likely to continue when both the Dow Jones Industrial Average and the Dow Jones Transportation Average are showing strength, as has been the case recently.

Short of Breadth

Interestingly, while MarketWatch suggests “strength in the market’s breadth,” The Wall Street Journal argues that a lack of breadth has been keeping the market moving up. The Journal reported that the market’s advance recently has been led by “furious, sustained rallies in Amazon, Apple Inc. and Google parent Alphabet Inc., among others.”

When outsized gains are concentrated in a small number of stocks, some believe the broader market may be vulnerable to a pullback. Others see the future value of current investment spending at companies that have a significant advantage in key markets as justifying ever-higher stock valuations.

Is a broader assessment of a company’s financial and strategic progress necessary? Or is a price/earnings ratio that’s out of line with historical averages a sign that a bubble may be bursting?

The P/E ratio for the market as a whole has averaged 16.8 since the 1870s. Amazon’s P/E ratio is about 85 and has averaged around 115 for the past three years, according to FactSet.

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