Published in the Aug. 5-18, 2015 issue of Morgan Hill Life
By Dan Newquist
It seems like anytime there is a dip in the stock market (like the one we experienced the later part of July), we hear the same comments: “The bull market has gone on for too long,” “We are due for a correction since we haven’t seen one in a while,” and “Valuations are too high so stocks are going to fall.” Let’s look at each of these comments in the context of today’s market.
Many investors get nervous when they hear about how long a bull market has run. For the sake of defining terms, a bull market describes a period of time when stocks generally go up. By contrast, a bear market is when stocks generally go down (or sideways) over time. The market goes back and forth between bull and bear markets over various multi-year cycles.
The current bull market started in March 2009 and is still going. While a six-year bull market is impressive, it certainly isn’t the longest. In fact, our current bull market is only the third longest one since 1928. According to Bespoke Investment Group, the longest bull market went from December 1987 to March 2000. That is more than 12 years. The second longest bull market lasted for seven years beginning June 1949 and ending August 1956.
To beat the longest bull market on record, our current bull market would have to continue until June 2021. While we would love for the current bull market to continue that long, it isn’t prudent to think that it will. However, there is nothing to say that it isn’t a possibility. The main point is that length alone isn’t going to tell us when a bull market is going to end.
In a similar vein, investors typically think that corrections (i.e., a stock market decline of 10 percent or more) should occur on a regular basis. While most investors view these types of temporary declines as the price we pay for higher returns over time, there is no rule that says they have to occur.
In the U.S., we last saw an official -10 percent-plus stock market correction in 2011 with a decline in the S&P 500 of -19.4 percent (source: Yardeni Research, Inc.). We were fairly close to correction territory a couple of times in 2012, but market declines never passed the -10 percent level. During the 12-year bull market mentioned above that ran from December 1987 to March 2000, there were only three -10 percent-plus corrections. So, we can’t assume that just because one hasn’t occurred recently, that one is going to occur. The stock market has proven that to be the case.
Lastly, we continue to hear chatter that valuations (i.e., the price-to-earnings ratio) are high and therefore it isn’t a good time to buy stocks. Research from J.P. Morgan found that when interest rates are low (like they currently are), stock valuations are typically higher. This is because investors generally prefer the upside opportunity of stocks when the interest from bonds is low. While valuations are not cheap in today’s market, they aren’t at extreme levels. Research suggests that higher valuations are typically OK when interest rates are low.
Are all these reasons for a bull market end justified? Time will tell, but we don’t think that rules of thumb will overpower economic expansion and good corporate results.
DAN NEWQUIST, CFP®, AIF®, Principal & Senior Wealth Advisor with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at 408-779-0699 or dnewquist@RNPadvisory.com. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.