“The Bull Market is Marking its 10th Anniversary by Making New Highs. Can The Momentum Continue?”

Is this bull market showing its age or just getting its second wind? March 9, 2019, marked the official ten-year anniversary of the current bull market—the longest in history as defined by months of rising markets without falling 20%, which would signal a bear market. Since the market bottom on March 9, 2009, the S&P 500 is up 337%. When you add in dividends, it’s up 431% (as of June 20). This is an increase of over 17% a year on an annualized basis, which is not the highest return ever seen in a bull market run, but certainly the most durable. In fact, there have been quite a few events over the past decade that might have tripped up the market. Consider the “Flash Crash” of May 2010, the European Sovereign Debt Crisis of August 2011 (U.S. debt was downgraded as well), Brexit and the tumultuous presidential election, with the latter two occurring in 2016. Most notably in our view is that interest rates began to rise at the end of 2016.

It’s worth noting that this bull market has done much to lift the economic status of a large number of Americans on an unprecedented scale. Household and nonprofit net worth is up 92% or $52 billion (as of March 2019). Job creation has been strong as well, with 20 million new jobs created over the past decade. Unemployment is now 3.9%, a 50-year low.

Price to earnings (P/E), or a standard measure of stock market valuation, expanded significantly during this bull market. Economic growth has been slow and steady, leading to modest earnings growth that was significantly below the pace of stock market growth. Valuation became a major engine of stock market growth as P/E expanded from 14 times in 2009 to 23 times by the end of last year. This is due mostly to the Federal Reserve’s successful campaign to lower interest rates and create a very accommodative monetary environment.

Can the bull market keep running?

As the saying goes, no expansion has died a natural death; expansions are usually killed by a change in Fed policy toward higher interest rates. Today, the impact of the ongoing trade negotiations between the U.S. and China is having an outside impact on economic growth and market sentiment. Worries surrounding the potential new trade landscape and the real impact of tariffs has led global export orders to fall to the weakest reading since 2012. In response, the Fed is becoming more accommodative once again. The potential of slowing global growth to impact U.S. growth is a real threat, and inflation is simply too low at this point to justify high interest rates. In fact, actual inflation has only hit the Fed’s target once in the last seven years. Headline inflation currently is 1.5%, with the Fed’s target at 2%.

We think the combination of technology, demographics, accommodative policy and strong consumer dynamics will work to keep the economy going and thus drive modest stock market growth from here. Trade is clearly the key to what is likely bifurcated outcomes. This is a high-stakes game, and both sides have large incentives to get a deal done. We anticipate some form of a deal by year-end, which will boost more pro-cyclical industries such as manufacturing. We continue to see dividend growth strategies as well-positioned to navigate these market tensions.

 

Christopher O’Keefe
CFA Lead Manager, Logan Dividend Performers,
Dividend Performers Balanced