10 numbers that explain this bull market

Does the market have more upside, or does it need a breather? And where is it heading? These figures provide some insight.

By StreetAuthority Aug 5, 2013 5:15PM
Image: Bull figurine on ascending line graph and list of share prices (© Adam Gault/OJO Images/Getty Images)By David Sterman

After the markets steadily fell over the second half of 2008, the first trading day of 2009 brought a dose of investor optimism, with the S&P 500-stock index rising 3% to close at 932. Hopes of a sustained rebound were quickly dashed as the index went on to finish below 700 just a couple of months later.

Even the boldest investors, piling their final funds into the market in search of deep value, were about ready to throw in the towel.

And then, the clouds suddenly parted on the morning of March 10, 2009, and stocks began to climb and climb. A little more than four years later, the S&P 500 ($SPX) has racked up a stunning 150% gain. And yet, as the market moves ever higher, investors have grown antsy.

The rally hasn't come on the heels of a robust economic expansion. Instead, the U.S. economy muddles along, as key trading partners move in and out of intensive care. Does that mean stocks are now overvalued in the face of considerable global headwinds? Well, a closer look at the numbers can give a sense of whether this bull has more room to run -- or if it is growing tired. Here are 10 ways to look at this market.

25% vs. 1%
In the past year, the S&P 500 has risen roughly 25%, even as aggregated 12-month trailing profits for companies in the S&P 500 rose roughly 1% in the second quarter of 2013, compared with the prior 12-month rolling period. The outlook for profit growth in the next few quarters also calls for aggregated earnings-per-share (EPS) growth in the low single-digits.

14.5 vs. 17
A year ago, the S&P 500 traded for about 14.5 times trailing 12-month profits. That figure now stands at 17 times trailing profits. That's slightly above the 10-year average, according to Bespoke Investment Research. Looking at the past 85 years' worth of data, bull markets tend to begin with an average trailing price-to-earnings (P/E) ratio of 11.1 (which was the case at the end of 2008). And bull markets tend to end, on average, when the figure reaches 18.2. By that math, we have less than 10% upside remaining until we hit the upper end of the average. Then again, some argue that P/E ratios simply don't matter. At the start of 1998, the trailing P/E on the S&P 500 stood at an already elevated 20 -- but still moved up to 30 in the next two years.

Yale University economics professor Robert Shiller prefers to look at earnings in the context of economic cycles, developing what he calls the cyclically adjusted price-to-earnings ratio, or CAPE.  The technical explanation: "The numerator of the CAPE is the real (inflation-adjusted) price level of the S&P 500 index, and the denominator as the moving average of the preceding 10 years of S&P 500 real reported earnings, where the U.S. Consumer Price Index (CPI) is used to adjust for inflation," according to his website.

As of July, this figure stood at 23.8. That's up from 20.5 at the end of 2011 and 15.3 at the end of 2008. The current reading is the highest since January, 2008, when it stood at 24. For a bit of perspective, the CAPE exceeded 40 back in 1999 and 2000, so we're hardly in frothy territory.

Our current bull market has been underway for 1,600 days. From 1928 through 1973, the average bull market lasted 1,140 days. From 1974 through 2007, the average bull market lasted roughly 2,650 days. By that measure, this bull market could last three more years.

$1.42 trillion
That's how much money is now invested in exchange-traded funds (ETFs). That compares to $531 billion at the end of 2008. The 170% increase in ETF assets since the end of 2008 is roughly double the rise in the S&P 500 in that time, implying that inflows into ETFs, and not just asset appreciation, are a key hallmark of this bull market. It also means traditional stock picking is losing favor to sector, industry and thematic styles of investing. Meanwhile, investors still had $13 trillion in mutual funds as of the end of 2012 -- according to the Investment Company Institute, putting to rest the notion that "ETFs are killing mutual funds." 

After shrinking 2% in 1982, the U.S. economy roared to life, averaging 5.5% GDP growth over the next three years, and then averaging 3.5% annual GDP growth over the next 15 years, according to the Bureau of Economic Analysis (BEA). That coincided with an 18-year bull market (if you exclude a brief correction in 1987).

Coming out of the recession of 2008, the U.S. economy has had a hard time generating growth in excess of 2% (with the exception of a few quarters in 2012). This year, GDP has grown just 1.1% in the first quarter and 1.7% in the second quarter, which helps explain why corporate profit growth has largely stalled out.

The percentage of sales generated by companies in the S&P 500 from foreign sales offices peaked at 48% in 2008 (after rising from 43% in 2005). That figure now stands at 46% after dropping for four straight years. In effect, U.S. economic activity, along with corporate profit growth, has been clearly hampered by troubles in Europe. To the extent that China's woes deepen, affecting large U.S. export markets such as Australia and Brazil, the export figure may keep dropping. Then again, an eventual rebound in Europe could help reverse the trend and provide a key growth tailwind that extends this bull market. 

That's the average dividend yield on the S&P 500, according to IndexArb.com. Though companies have been boosting dividends at a rapid pace, they can't keep up with the surging bull market, so the dividend yield has been steadily falling. At the start of the bull market in 1982, the dividend yield on the S&P 500 stood at 6.7%. Today, there are only two companies in the S&P 500, Windstream (WIN) and Frontier Communications (FTR), that have a yield above 6.7%. The S&P 500's dividend yield hit an all-time low of 1.4% in 1998, as market gains outpaced dividend growth by a wide margin.

$1.27 trillion
That's how much cash was parked on the balance sheets of non-financial firms in the S&P 500 at the end of 2012, according to FactSet Research. The pile of cash grew 6.1% last year, despite the fact that share buybacks and dividends are growing at a 10% pace. The most important implication for this bull market:  Any sharp market pullback would be swiftly met with increased buybacks.

That's the number of companies in the S&P 500 that are expected to boost sales at least 10% in 2014. And only 21 of those are expected to generate at least 20% revenue growth in 2014. Fully 40 companies in the S&P 500 are expected to see revenues fall in 2014.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

More from StreetAuthority
Aug 5, 2013 8:47PM
There's only one number that explains this bull market - 85 billion.  That's how much money Bernanke is creating out of thin air and pumping into the economy, month in and month out.  That's the only number that really matters.

Consider this; our economy is growing at roughly $35 billion every month.  Bernanke is pumping in $85 billion a month.  Do the math...
Aug 5, 2013 6:22PM
$16,889,764,000,000 that's how much debt the US owes as of 3 minutes ago.
Aug 5, 2013 9:08PM
The $85 billion electronically entering the markets through banks- doesn't leave the markets. There's a vast difference between an enterprise growing from Main Street sales activity and a company with too much finance and administration literally a complete BUST in the sales area. Cars are robust because there's still Subprime lending and the Fed's buy-back program refreshes that capital before natural conditions like NONPAYMENT take it away. The very idea of comparing this BS Run to any other is a major stretch. A crime is still a crime even if Wall Street says it isn't. 90 million un and under-employed, a 5-year gap in skill sets put to active use, gross negligence and willful misconduct in every sector AND government. If QE ended tomorrow, not one business platform could stand on it's own. One of the Fed Kool Aid addicts says QE will continue until there are signs that it isn't necessary. If the QE is causing the suppression of recovery efforts, then it is fated to be indefinite. At one point, it becomes totally useless to the society. So... here are some numbers to appreciate because they are real: The markets will fail TWO ways-- dysfunction due to over-dependence on paper and button pushers and severance as a needful thing to the rest of us. Investors have ZERO. ZERO is a number. It represents the value of stocks to a nation that cannot get employed. When enough people are tired of being screwed, we get Orange, Nord, HAL, Ball Street and XP Alodocious Bank instead of Apple, Ford, IBM, Wall Street and JP Morgan Chase... and there's not a damn thing those hollow business platforms can do about it. Bull run. my asss.
Aug 6, 2013 9:07AM

It is hard for me to understand how the pink elephant is completely ignored. The baby boomers have not left the building, This over sized group, can not be over looked, or understood. In 1976 my high school history teacher had a poster on the wall showing the 10 -1 workers needed in the year(2000)at the time so far in the future! to support just the S.S.I. system! What will the market look like when they start to take money from their 401ks? will the part time workers of today be buying mutual funds or food? 50 years from now economists' will look back on this time as the beginning of the bear market, that is still in place! 

Aug 6, 2013 7:03AM
By the way... I know most right-leaners only read what they want to, but did any of you check out the article where Obama will lobby for the closure of Fannie and Freddie? He will be backed in doing so by BOTH parties but so far, no ignorant House zombies. There is a near-parallel to the GSE Era and the Buffett Ride. A reminder that Government Sponsored Enterprises for mortgages came about because the majority of the nation were wage-earners with nearly identical credentials buying tract homes. The diligence and thus the servicing was- repetitive or could be precisely trended. In 1994, a FNMA survey revealed that less than 40% of America continued to slot into the Fannie/Freddie criteria. Today, if the survey was conducted again, the trending pool would be very close to zero. That makes the odds of a GSE doing and being what it was created to-- impossible. The GSEs will dissolve. Banks were always the primary client for GSE advantages, so the lobby will require bank divestiture next. With the banks divested to likely- state boundaries with new entities conducting interstate transacting beyond boundaries, the Fed goes away. In order to make that be our course... the Buffetts and a handful of others are powerful enough to collapse the stock market Kool Aid game and send the wealth tied-up in dysfunctional business platforms into the debt notes of this folly and cancel each other out. It-- pops the pimple and seals the pore. Notably, every one else in the markets through banks, fund groups and brokerages- has no hands-on accessibility for taking possession of certificates (you are all electronic and I'll bet NONE have read the disclosure you agree-to about every 3 months). You get-- ZIP out of this. A reserve script-form currency stops gold from being of any significance. The ONLY course with a horse and cart is Free Enterprise. To win... you need to get off your fiat assets and be doing something in the economy that matters TO the economy. Place your bets now, but I only take real currency and I don't mean paper money or the bogus kind-- stocks, bonds, metals or real estate.
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