Investors are singing “Happy Birthday” to the bull market, while weighing how far it can extend its historic run.
Thursday marks the eighth anniversary of the March 9, 2009, closing low set by the S&P 500 index SPX, -0.23% in the wake of the financial crisis—a rout that took the benchmark down by 54% from peak to trough. If measured from that date—determining the start of the bull market isn’t without controversy—this remains the second-longest bull market since World War II.
Various measures of bullish sentiment—a typically contrarian indicator—are running strong, retail investors are finally showing the market some love, and stocks are undeniably expensive. Still, typically telltale signs a bull market is running out of road have yet to materialize, said Doug Ramsey, chief investment officer at Minneapolis-based Leuthold Group.
“Eight years into this thing, I cannot credibly even argue that a topping process has begun,” he said, in a phone interview.
While the end of a bear market is typically punctuated with a spike lower on a bout of panic selling—think back to March 2009—the finale to a bull market is usually more drawn-out, marked by a rounding-type top.
Often, segments of the market begin to fade one by one. Typical bellwethers include utilities, financials, transportation, small-caps and “all kinds of market breadth” measures, Ramsey said, noting that a typical market top usually takes at least four months to unfold. While utilities and other bondlike stocks stumbled last year, bellwether sectors and small-caps, which typically are the first to “sniff out” coming economic pain, are in rude health. All major stock indexes, including the small-cap Russell 2000 RUT, -0.64% notched a series of records in recent weeks.
“After a lengthy, cyclical bull market there will be some sort of topping process. You won’t have this inverted V-shaped top where small-caps, large-caps, mid-caps, cyclicals, defensives—everything—tops more or less on the same day,” he said.
Sam Stovall, chief investment strategist at CFRA, said he expects the bull to last at least another year, but warned in a note that the S&P 500’s roughly 19% gain over the last 12 months is at the midpoint of final-year returns of prior postwar bull market final-year returns. And with poor investor confidence no longer a contrarian reason to feel encouraged, investors should at least be on the lookout for a “FOMO (fear of missing out) mind-set that could signal overconfidence and sound the final lap of this bull market,” he said, in a note.
This bull market isn’t only the second oldest, it’s also the second-most expensive, Stovall noted. On a trailing 12-month basis, using Dec. 31, 2016 GAAP earnings per share, the S&P 500’s price-to-earnings ratio stands at 25—second only to the 30 times earnings multiple recorded at the end of the tech bubble in 2000, according to CFRA.
Investors, however, are encouraged by a projected 11% rise in 2017 operating-earnings per share and think the growth could be even stronger if the Trump administration successfully delivers on promised tax cuts and increased infrastructure spending, Stovall noted.
Others see the potential for a final “melt-up” that could mark the top, though the ingredients aren’t all in place.
Analysts at Bank of America Merrill Lynch have been warning investors to beware what they have dubbed the “Icarus trade,” named for the Greek myth in which Icarus ignored his father’s warnings and flew too close to the sun, melting the wax on his homemade wings and plunging back to earth. In their scenario, stocks and other assets perceived as risky could have room for one last surge higher in the first half, perhaps allowing the S&P 500 to top 2,500, before succumbing to gravity.
As always, time will tell.
Meanwhile, even if the bull market likely has room to run, retail investors shouldn’t be all-in on U.S. stocks at current levels, said Ramsey.
Retail investors should “be a click or two back from maximum equity exposure,” Ramsey said. They should also remember that they can be “much more value oriented and not worry about being out of sync for 12 or 18 months,” he said, adding that a tilt toward foreign stocks of almost any stripe is probably also sound given stretched U.S. valuations versus most other regions.
Meanwhile, have some cake and watch the tape.