Are We There Yet? When Does the Market’s Trip To New Highs End?

market

Knock on wood, but it looks like 2017 is going to be another solid year for the stock market. The S&P 500 crossed the 2,500 milestone mark on September 15 and is up over 12% through the close on Thursday, September 28. Earlier in the month, BloombergMarkets pointed out that the index’s performance run of 270%, since the credit crisis in 2008, became the third best-performing, and the second-longest bull market in U.S. history.  Despite the strength and length of this bull market, it has been called the most-hated bull, because investors haven’t trusted it. The 2008 markets hurt them badly and many of the economic woes have yet to abate.

Michael Bloomberg, in an interview with CBS News’ Anthony Mason, said, “I cannot for the life of me understand why the market keeps going up.”

State of the union

The economy has continued to improve at a snail’s pace for years. There have been setbacks both in the U.S. and internationally.  More recently, the U.S. presidential election at the end of 2016 has been a catalyst for U.S. stocks, as investors expect a pro-business climate and bigger earnings as a result.

The Federal Reserve (Fed) raised interest rates for the third time in March, to a level of between 0.75% and 1.0%.  More importantly, the Fed rolled out a plan on September 20 to gradually decrease the trillions of dollars’ worth of bonds accumulated through its quantitative-easing programs over the past 10 years.

The Fed is charged with maximizing employment and moderating inflation and is moving toward achieving both goals. Unemployment rose slightly in August to 4.4%, but that is still below the natural rate of unemployment of 4.5% – 5.0%. After several years of concerns around prices not increasing fast enough, core inflation rose roughly 1.7% over the 12 months ending in January 2017 and has remained in that range through August 2017. The Fed’s target rate for inflation is 2%.

The yield curve shifted upward and steepened as the Federal Open Market Committee (FOMC) announced the start of balance sheet normalization. Both short- and long-term rates rose as the probability of recession within 1 year fell to 12% as indicated by the Federal Reserve Bank of Cleveland.

The bottom line here is that while bonds are about to face a headwind, they still have a role to play in a diversified portfolio and have an opportunity to provide value to that portfolio even through the headwinds. Since Treasuries are the only truly negatively correlated assets to equities, don’t be afraid of your bonds, be afraid to be without your bonds.

Are we there yet? When does the market’s trip to new highs end? Click To Tweet

Speaking of Equities

Since this is the hated bull market, many have expected it to fail. Let’s recap some of the most popular reasons:

  1. It has been more than 400 days since the market had a 5% decline in value.
  2. Stock prices are overvalued. The only time in history where stocks were valued more highly was in the tech bubble of the late 90s.
  3. Quantitative-easing is coming to an end.
  4. The federal government is insanely in debt.

Investors have seen these issues, tried to digest them and some may even believe they understand how the issues will affect the market going forward.  Let’s take a look at the other side of the equation.  The reasons this bull market could continue include:

  1. Money has fled stocks since 2009, which means there should be equity money on the sidelines ready to come back into the market potentially driving it higher.
  2. Corporate America has dwarfed any other buyer. Companies have purchased over $3 trillion in their own stock since 2009. Maybe they are biased, but who knows the company better than the individuals running the company? If they see value, should we look harder?
  3. The market is highly valued, but it is still reasonably valued relative to bonds. Meaning the yield on the S&P 500 is still attractive relative to 10-year Treasurys.
  4. Earnings momentum isn’t showing any signs of slowing. The S&P 500 had its first back-to-back quarterly profits exceeding 10% since 2011, and analysts are expecting companies to sustain that level of growth over the next 3 years
  5. The momentum is on the market’s side. The S&P 500 took over 5,000 days to go from 1,500 to 2,000, but only 1,000 days to go from 2,000 to 2,500.

As this bull market continues to climb, it brings wealth to those that remain invested and undeterred. It brings disappointment and resentment to those that took their money out of the market expecting further collapse and tribulation. For every day the market goes up and adds to this historic tally, the probability of a correction increases, but it is not known when, how much or how long the next correction will be. As always, advisors have to take solace in the fact that they truly know their clients, they have invested their clients’ portfolios in a manner consistent with clients’ goals, and know that a diversified portfolio may not win in all time periods, but it wins over time.

Source: SEI, Bloomberg, ICI, S&P 500

Past performance is no guarantee of future results. Investing involves risk including losing money.  Opinions presented are for information only based on author’s research and experiences and are prepared at a point in time.  SEI does not intend to provide updates.  Readers should not rely on this information as investment advice. 

Share Button
John Frownfelter

John Frownfelter

John Frownfelter is the investments contributor for Practically Speaking and the managing director of investment solutions within the SEI Advisor Network.

Learn More About John Frownfelter

Subscribe

Categories

Follow Us on Facebook

Recent Tweets