In market parlance, the U.S. bull market for stocks is a senior citizen — now in its eighth year, Wall Street’s run has exceeded the historical average length of a bull market by more than three years. While markets were volatile early in the year, with the Standard & Poor’s 500 index down more than 10 percent, the strong rebound from mid-February has propelled the market to slightly higher levels on the year.
Despite getting old, there are still signs this bull market will continue.
“At 84 months, this bull market run is the third-longest in history,” says Hank Smith, chief investment officer at Philadelphia area-based Haverford Trust. “Despite headlines to the contrary, age does not kill bull markets. Recessions or the anticipation of a recession end bull markets. Fortunately, the economic data does not support that narrative.”
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While economists have bemoaned the sluggish growth rate of the current economic cycle, there could be a silver lining to the slow but steady outlook.
“One of the advantages of the so-called ‘2 percent recovery’ is there has not been enough growth to create traditional excesses — inflation, inventories, overstaffing, overbuilding, overbuying, overlending — that would typically lead to the next recession. This could turn out to be one of the longest economic expansions,” Smith says.
Here are six reasons bullish analysts remain optimistic on the prospects for stocks this year:
Consumer confidence is strong. Consumers drive the economy and there are still plenty of reasons for optimism. “Household net worth is at record levels, up about 25 percent from the previous peak. Household debt service is at a record low. Nationally, home prices have regained most of their losses from 2008,” Smith says. “Auto sales are at near records. Retail sales are about 10 percent above the previous recovery peak. Interest rates, inflation and gas prices remain low.”
Stability in crude oil. The price plunge in crude oil may have found a bottom at the $26 per barrel zone hit in January. Crude oil has rebounded toward the $40 per barrel area and many analysts think the market may have finally bottomed out. “Oil’s collapse from late 2014 through 2015 has been a primary concern for market participants. We continue to see some upside to oil prices between now and year-end,” says John Canally, chief economic strategist for LPL Financial in Boston.
Clarity on China. Part of the early-year sell-off stemmed from concerns about a potential hard landing in China following years of slowing economic growth there. “For now, the market seems to be satisfied that Chinese authorities are saying and doing the right things,” Canally says. In early March, the Chinese government lowered its 2016 growth target to 6.5 to 7 percent, following last year’s 6.9 percent growth rate.
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Earnings growth. Earnings will be a big key to driving stocks higher, Canally says. “Steady GDP growth in 2016 should help set the tone for better corporate revenue growth, which historically has correlated well with the growth of the overall economy. Adding in improving growth overseas, a more stable dollar and stable energy prices, we think will help drive earnings gains in the mid-single digits by the end of 2016 and into 2017,” Canally says.
Recession risk is low. While manufacturing remains in modest contraction mode, the backdrop for the U.S. consumer is generally favorable, says Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. “Wages are firming, consumer savings are up, low energy prices are bolstering discretionary spending and housing remains solid. Importantly, bear markets typically occur in and around recessions when inflation is heating up. The Fed is fully entrenched in tightening mode, valuations are extended and investor sentiment is approaching euphoria. This does not seem to reflect our current environment.”
Investor psychology is a positive. This has been one of the most hated bull markets, Smith says. “From a sentiment standpoint, bull markets usually end with euphoria. Think back to the dot-com craze at the end of the ’90s or more recently the housing bubble. Investors rush in to buy assets they think can only go up in value,” Smith says.
What are investors doing today? From the start of the bull market, domestic equity funds have seen net outflows of more than $600 billion, Smith says.
“This January alone saw $40 billion withdrawn from stock funds. During the same period over $1 trillion net has flowed into bond funds,” he says. “Anyone buying a bond today with their paltry yields, or hiding in cash with no yield, is not making a statement about their exuberance. These tangible actions don’t reflect greed or euphoria but rather fear and anxiety. This bodes well for the bull market.”
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Investors can take heart that the bull market appears intact for now. “In our view, equities are poised to grind higher in 2016,” Sandven says. What to watch now? “Upcoming first quarter results and company guidance are likely to set the tone for equity performance heading into mid-year.”
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6 Reasons the Bull Market Won’t Go Away originally appeared on usnews.com
