Do you remember March 9, 2009? On that day, amid the worst recession since the 1930s, the bear market in stocks ended. Since then, share prices have gained nearly 250 percent, making the current bull run the third-largest since 1928 and second-longest since World War II. In duration, only the rally from 1987 to 2000 has it beat.
A decade ago, it was hard to see the clouds parting. The U.S. government was funneling capital into the financial system. Corporate earnings were collapsing. The Wall Street Journal led its investing section with a story warning that stocks could return to levels not seen since 1995.
But they rallied, thanks largely to ultra-aggressive monetary policy from the Federal Reserve as well as a series of bailouts, capital injections and stimulus programs funded by U.S. taxpayers.
At this bull’s height -- at which the market now stands, with trillions in new wealth created -- investors would do well to put all of this in context. Consider that stock prices are increasingly unlikely to keep pushing higher (unless “this time is different,” which it rarely is).
According to Bank of America Merrill Lynch, since the 1920s, bull markets of 20 percent or more last on average just under three years and gain just over 100 percent from their inception. The current bull market has lived three times the typical lifespan and has returned 2.5-times that average to investors.
The longest bull run, from 1987 through 2000, lasted 149 months -- more than 12 years while returning a whopping 582 percent to investors. Yet that coincided with the advent of the personal computer era, the rise of the internet, ultra-low oil prices, projections the U.S. national debt would be repaid and the “peace dividend” from the end of the Cold War.
Now, however, the Fed is set to raise interest rates again next week for the second time in three months, a marked acceleration of monetary tightening. Over the last 10 years, the Fed has raised rates only twice.
Partisan rancor dominates Washington. The national debt is surging toward the $20 trillion threshold as the debt ceiling looms again. Corporate earnings growth is contending with headwinds including fresh weakness in energy prices, rising unit labor costs/weak labor productivity and a strengthening U.S. dollar.
And while confidence and survey data is strong, thanks to hopes of tax reform, deregulation and infrastructure spending from President Trump, the “hard” economic data has pushed down the Atlanta Fed’s GDPNow real-time estimate of first-quarter 2017 growth to a pitiful 1.2 percent.
If all that isn’t enough to perhaps generate some caution, consider this: According to Yale economist Robert Shiller’s cyclically adjusted price-to-earnings ratio, stocks are currently in the top 3.7 percent of all months in terms of valuation, since 1871.
That means the only time investors were willing to pay more for stocks than they are now were in the months heading into the 1929 and 2000 market crashes.
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