What this bull market needs to continue
Stocks are set to reach a big milestone Monday. Here's how the upswing can keep going.
U.S. stocks enter their sixth year of a bull market this Monday, joining a rare group of multi-year stock surges that can support early retirements, pay off college debt, and make pension funds whole.
Or not. The fifth year of the last bull market ended spectacularly and painfully for investors in October 2007, leaving many so scarred they avoided stocks years into this latest rebound.
The good news: The few cycles that make it past their fifth birthday keep motoring along, churning out as much as a decade of gains. Momentum is your friend: On average, the sixth year has produced 26 percent growth.
The bad: There's plenty that's different this time around, starting with the Federal Reserve's full-throttle bond buys to flatten yields. The S&P 500 already produced an eye-popping 30 percent gain last year. The economy needs to get back its mojo -- the 3 percent growth rate that's been elusive since 2005.
"What ended nearly every [bull market] was a recession, so we need continued economic growth," said Jeff Kleintop, chief market strategist at LPL Financial.
The almost five-year-old bull market started on March 10, 2009, when the Standard & Poor's 500 Index ($INX) and the Dow Jones industrials ($INDU) both rebounded 6 percent in one day off their respective multi-year lows reached March 9.
At the low, the S&P 500 closed at a bottom of 676.53, a drop of nearly 57 percent from its October 2007 highs. The Dow closed at 6,547.05. Since then, the S&P 500 has climbed 177 percent and the Dow has gained 150 percent.
Concern that days are numbered for the current bull market are not unfounded. A minority of bull markets since 1945 have made it to their sixth birthday.
Including the current bull market, there have been 12 since the end of World War II. Of those, only half made it to a fifth birthday, according to Sam Stovall, chief equity analyst at S&P Capital IQ, in a recent note.
After that, the list gets halved again for those making it to a sixth birthday. Those bull markets include the seven-year bull market that ended in August 1956, the six-year bull market that ended in November 1980, and the nearly 10-year-old bull market that ended in March 2000. Those go-go days of the 1990s bull market, which ended in the Internet bust, fattened nest eggs with an S&P 500 gain of over 400 percent.
The history is tantalizing, particularly for investors still repairing the damage from the last bear market and a concurrent housing market collapse.
Here’s what this bull market needs to do to make it to its sixth birthday, says Stovall:
- U.S. economic growth needs to ramp up and reach 3 percent by the end of 2014 supported by gains in auto sales and housing.
- Earnings per share growth needs to increase in the mid-to-high single digits in 2014 coupled with gains in revenue. Stovall expects an 8 percent advance in EPS with revenue rising 3.7 percent.
- Congress needs to indicate that it is working toward meaningful tax reform legislation by 2015 to help spur increased capital expenditures and repatriation of foreign earnings.
- Valuations based on price-to-earnings ratios remain supportive.
That last part can be troubling given concerns that stock prices have grown faster than their supporting earnings. Stovall said that while the trailing 12-month P/E is above average since 1947, it's actually below the average when the consumer price index has been in the 1.5 percent to 2.5 percent range.
For the economy, a 3 percent growth rate for the U.S. isn't a slam dunk. The U.S. economy hasn't grown 3 percent or more in nine years. A recent revision of fourth-quarter GDP figures showed the economy growing at 2.4 percent, down from a previous figure of 3.2 percent.
In this aging bull's favor, it's still cheap to borrow to buy and build. The yield on the 10-year Treasury note is in the 2.7 percent range -- in contrast to 4.65 percent at the end of the last bull market in October 2007.
Back in March 2009, P/E ratios for stocks in the S&P 500 had fallen below 11x. Now, they're back over 17x, where they were at the end of the last bull market in 2007. That means that earnings growth has become even more crucial to cool off those multiples.
Bull markets tend to tap out when trailing 12-month P/E ratios get into 17x to 18x territory, Kleintop said. Earnings can support valuations for now but are not enough to support another big market surge, Kleintop said.
"We know what expensive looks like, so we're pretty shackled to earnings growth," Kleintop said.
That view is pretty consistent with what many strategists were calling for in December: After a big jump in 2013, stocks will likely grow in the mid-to-high single digits in 2014.
Another indication the current bull market will see a sixth birthday is that market breadth is relatively stable, meaning no one sector or handful of stocks is fueling the market.
The biggest drivers of the current bull market have been consumer discretionary stocks, followed up by financials, industrials, and tech stocks.
That's opposed to the bull market that ended in 2000, where tech stocks were far and away the sole market driver, according to Kleintop. In the current bull market, growth is being driven by cyclical stocks, which are closely linked to the economy. While they may be expensive, consumer discretionary stocks have been more productive than they have ever been, and are therefore deserving of a higher multiple, Kleintop said.
Notable consumer discretionary stocks that have jumped in price by more than 1000 percent over the past five years include Wyndham Worldwide Corp. (WYN), CBS Corp. (CBS), Priceline.com Inc. (PCLN), Wynn Resorts (WYNN), Expedia (EXPE), Chipotle Mexican Grill (CMG), and Netflix (NFLX), according to FactSet.
In 2013, financial and consumer discretionary earnings led the pack with gains of 16.3 percent and 11.3 percent, respectively, according to John Butters, senior earnings analyst at FactSet. That's compared with the 4.9 percent increase in the S&P 500 for the year. In addition, consumer discretionary stocks also saw an above-average gain in revenue at 4.8 percent in 2013.
Outside of GDP growth in the 3 percent area, the key to economic growth in 2014 will have to come from capital expenditure spending and hiring from corporations, which are sitting on record cash piles. That's crucial because capital investment accounted for no GDP growth in 2013, according to Kleintop.
Capital expenditure spending may improve in 2014, according to a recent note by Russ Koesterich, BlackRock global chief investment strategist.
Given the lackluster recovery, Koesterich said companies are still conservative given the overindulgences and excess capacity of the past two bull markets. Also, consumer confidence is just beginning to recover with current levels still under the long-term average. As the consumer strength returns to speed, certain industries are likely to benefit.
"In terms of specific beneficiaries, we believe spending is likely to be led by financial, telecom and service industries," Koesterich noted. "This suggests that technology companies may be beneficiaries if capital spending begins to accelerate."
More from MarketWatch
The market has more of a 25 P/E ratios not 17 if you look at key players and some like Telsa are at -250 P/E ratios right and got a price upgrade of like 10 dollars in the near term???
Yep when the fundamentals tell you to sell and get out of Dodge and you hang around as some people who are paid to remove you from your money tell you things are rosy you should sell and move on.
NOW IS THE TIME TO SELL OFF FOLKS -- last warning.
"What this bull market needs to continue"
More govt intervention, manipulation and falsified economic reports on housing, jobs, unemployment etc. Our govt should be ashamed of the this false economy they have created by putting our country trillions of dollars in debt. The 1%'ers are driving this bus and the rest of us are watching it go by as there is no room on the bus. Pretty sad...
Let's let the Fed cut QE to "0", (which is what it should have been all along), and then let's see how well the markets hold up on their own.
Over the last 5 years, I've done very well, but unfortunately, America still feels like it is in a recession, even though, (if you believe the powers that be) the gubment says we ended the recession in 2009. If so, why do you have the lowest labor participation rate since the mid 1970's? The reason the unemployment rate has dropped, in large part, is because they no long include those that have given up looking. Why do you have more people in poverty today....after spending trillions since the 1960's, on a useless war on poverty that does nothing more than create larger and larger dependence on a government nanny state? Why do you have more people on food stamps today? And on and on it goes.
There is hardly any metric you can point to in economic terms that is not worse off today than 5 years ago, if you use real numbers, and not the manipulated government numbers.
Not to mention the debt is well on it's way to 18 trillion and beyond because the out of control government does not know how to reign in spending. Everyone can see that the price of many things is increasing, yet the government is still telling you inflation is not a problem.
Why do you think the government would say that? I mean, who ya gonna believe, the government, or your own lying eyes and wallet? The reason is pretty simple. The Fed has backed itself into a corner. If they told you the real inflation rate, they would have to raise interest rates. Even with the fake unemployment number, they know raising rates would make it worse. But, the biggest reason the Fed will never admit to the real number is because they also know that raising the interest rates would cause the deficit to grow astronomically as the rate the government pays on bonds would suddenly start to spike. You see the Fed also sets the rates for the money the government borrows, as well as everyone else. So, in essence, the Fed has done this to themselves, but as usual, it is we the people who will have to pay for their foolishness one way or the other. Not to mention that when the Fed starts raising interest rates, there will be a lot of folks heading to the exits in the markets.
The problem we have with the checks and balances in government is that they write the checks, and we are stuck with the balance.
Yeah, just what we need... MORE QE!!!
That's right you idiots at the fed, make the rich [who own the MAJORITY of stocks] even RICHER.
what the HELL, has that policy done for the REST of the American people?
Maybe the rest of the country should feel GRATEFUL that Wall Street is ONLY screwing us financially?
"U.S. stocks enter their sixth year of a bull market this Monday, joining a rare group of multi-year stock surges
The good news: The few cycles that make it past their fifth birthday keep motoring along, churning out as much as a decade of gains."
So to be or not to be, that is the question. So far, so good as massive Stock Buybacks and low Rates have kept the Party going like it's 1999, all over again. Same denials now, as then. However we have far higher National and Global Debt issues and we literally never solved the Problems that caused the Great Recession.
So as long as the current perceptions hold and Easy money keeps flowing, this will continue until Gravity takes holds. The Ride up was about most Fun speculators could ever have, too Bad most don't realize all Hades will eventually takes it's place. You can't Rob Peter to Pay Paul and not pay the Ultimate Price. Hold to Infinity types will of course suffer the most pain. They will never see it coming, they never have.
Time for the American economy to get up against the wall like a 9 year old boy and get the Sandusky treatment from Obama and the fed.
The DOW is only a "marker" of 30 components in the overall Stock Market..
I believe a "couple" of those components have been changed since 2007..??
The S&P is a much better Indicator, measuring the Health of Wall St. and/or Stock Markets...
It covers about 500 stocks/companies/components, a much wider selection..
The S&P has been setting new records almost on a weekly basis..
There are larger or wider Indices, with more components; Most except the S&P 500, Worldwide.
Whether the S&P 500 has went up 2-3% per year or even 5-7% makes little difference to me.
What our "Fair Market Value" (FMV) has increased in our Accounts, is of importance to us.
The overall Dollar or "money gains" from 2007, is the only thing that matters..
And that is based on equities owned or traded, in that time frame...
And that has been well over the average of the gain on the DOW...
Even throwing out the last 5 months of 2009 and all of 2010..(the biggest gain or recovery)..
We still handedly beat the DOW's 2% gain per year, since 2007; If that is correct ??
Copyright © 2014 Microsoft. All rights reserved.
As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.