Many Factors To Support A Continued Bull Market!
by Ian Harvey
March 25, 2013
The market for the bulls entered its 5th Year after Saturday, 9th March, 2013.
The hard-charging bulls, that have more than doubled their money since March 2009, are obviously in good shape to keep the momentum and gains going for Year 5.
It's prudent to point out that no market for the bulls -- no matter how profitable, popular or seemingly healthy -- lives forever. The average lifespan of a bull market is 56 months, as in four years and eight months. Put another way, most bulls don't make it to their fifth birthdays, according to S&P Dow Jones Indices.
It is important to remember that this bull, which was born after stocks bottomed on March 9, 2009, and which the Federal Reserve has repeatedly injected with a performance-enhancing and life-sustaining drug called cheap money, is showing a touch of gray around the horns and entering its Golden Years. This is not to say that “history repeating itself is set in stone” – therefore, this may be the “bull market of all bull markets” – as we are all aware, predicting the future is impossible!
Stock investors already in the market, or those on the sidelines thinking of getting in now that the Dow is posting hard-to-ignore gains, need to keep their fingers on the aging bull's pulse to make sure their portfolios don't suffer big losses when the bull eventually dies.
For now, Wall Street investment strategists are acting like insurance actuaries, inputting historical bull market data into spreadsheets in an effort to figure out how much more upside is left. The Dow Jones industrial average has enjoyed a gain of 122% -- 7,900 points -- since its low four years ago, and is trading just above 14,500, a level never seen before.
There is no reason why the bull's market will end any time soon -- many good things are occurring in the market.
This bullish outlook is based largely on the fact that improving economic data, including upbeat jobs reports and stronger recent readings on consumer sentiment, manufacturing and auto and home sales; suggest the economy is "slowly getting better."
Looking at several factors that will influence the continuation of the bull market during 2013 are:-
1. P/E Ratios
While the market isn't nearly as cheap as it was four years ago, the price of stocks when compared with the previous 12 months of earnings still trails the long-term average, as well as the heights reached when previous bulls have come to an end.
2. Factories Have Room to Grow
Industrial production has increased since the recession ended in 2009, but output is still not even back to pre-financial-crisis levels. So businesses can keep growing without big capital expenses.
3. Consumer Spending is Under Control
As investor confidence grows, overspending and over-borrowing are typically byproducts of an aging bull market. Since the financial crisis ended, though, prudence has been in fashion. That, combined with record low interest rates, has pushed average household monthly debt payments as a percentage of disposable income to the lowest level since the 1990s. Should the economy improve, consumers have the means to ramp up spending.
Another gauge of exuberance is housing starts. Last year the number of new homes being constructed in the U.S. rose sharply as the real estate market finally began to stabilize. But annual housing starts were still only about half the long-term average.
4. Interest Rates Low
The most common reason a bull market comes to an end is due to the Federal Reserve raising interest rates to slow the economy to prevent inflation from overheating.
Today there's little risk of such hikes. Slow growth (the U.S. economy actually contracted slightly late last year) has kept a lid on energy prices, hiring, and salaries -- and that's unlikely to change soon. As a result, the Fed plans to keep rates at or near record lows until at least the end of 2015.
5. Stocks Are Still Growing
In the midst of a bull market, most stocks get a lift. As rallies mature, however, the gains tend to become less evenly distributed.
An index such as the S&P 500 may continue to rise, but fewer companies within the benchmark actually power the advance. Analysts watch the ratio between winners and losers for signs that a bull is nearing an end.
Below, you'll see that in early 2007, Bloomberg's S&P 500 advance-decline index, which tracks these trends, began to flatten out ahead of the 2008 stock market crash. The index then began to rise sharply just before the start of the March 2009 bull market, and it has yet to stall.
As a bull ages more stable areas of the market, such as consumer staples and utilities, tend to be where the gains are.
But because this bull occurred during a time of so much economic uncertainty, those sectors have already had big gains as investors sought safety.
It is important to note that just because the Standard & Poor's 500 Index (SPX) has gone more than 520 days without a 10% drop, or correction, it doesn't necessarily mean a steep drop is looming, as many analysts warn. In the 1990 bull market, stocks rose for 2,553 days before suffering a correction. Similarly, after a correction early in the 2002 bull, the market went another 1,673 days without falling 10%.
History says that just because the average bull's lifespan is roughly 4½ years doesn't mean the current run can't last longer. Of the S&P 500's 11 bull markets since World War II, five were still around when they turned five, according to S&P Capital IQ. The bulls that lasted that long, posted average gains in Year Five of 21%. That tops all prior years except for Year One, which sports gains of 38%.
The past two bulls ran longer than average:-
• The 2002-2007 bull lasted five years.
• The decade-long bull that ended in March 2000, the longest bull in history, lasted 113 months, or more than nine years. It was also the biggest-gainer of all-time, posting a return of 417%, more than double the 162% average gain since 1932.
The current bull, which has climbed 128%, is sixth best of all time, says S&P Dow Jones Indices.
Therefore, considering the fact that this rally may have a while left to run research says to favor stocks that thrive in the middle of a bull. Technology, observing this statement, is worth a consideration.
As the chart below shows, tech has better-than-average growth potential and is trading at a discount to the S&P though it usually trades at a big premium.