With record in view, aging U.S. bull market may still be
frisky
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[August 21, 2018]
By Lewis Krauskopf
NEW YORK (Reuters) - Why settle for
nine-and-a-half years when you can do an even 10 or better? That’s the
thinking of a lot of investors measuring whether a historically long run
in U.S. stocks still has legs.
This Wednesday, the S&P 500's bull-market run will turn 3,453 days old,
which in some market watchers' eyes will make it the longest such streak
in history.
The bull was born in the ashes of the financial crisis and carried along
through much of its rise by $3.5 trillion of asset purchases by the U.S.
Federal Reserve. The debate now is over when, not if, its run will come
to an end.
"Bull markets are like incandescent light bulbs. They tend to glow
brightest just before they go out," said Sam Stovall, chief investment
strategist at research firm CFRA.
The record is of some question because Wall Street experts define bull
and bear markets differently.
The S&P 500 also would need to hit an all-time high after Wednesday to
confirm the milestone. As of Friday, the S&P 500 was 0.8 percent shy of
its record high, set on Jan. 26.
If the S&P fails to eclipse that high and drops 20 percent below it,
that would signify instead that stocks have been in a bear market since
the January peak.
But many investors are optimistic that the stock market in the near term
will avoid a plunge that would end the bull run, in large part because
of the U.S. economy's health.
"True bear markets are associated with recessions," said Walter Todd,
chief investment officer at Greenwood Capital Associates in Greenwood,
South Carolina. "I have to ask myself, 'When do I see a recession?' I
don’t see one around the corner."
To extend its run, as it has throughout the long march higher, the
market would need to shrug off a range of geopolitical concerns,
including trade tensions between the United States and its partners, an
emerging market rout set off by Turkey's sliding currency, uncertainty
over China's economy and upcoming midterm elections.
In the United States, while economists see strong growth for at least
the next year, investors did point to some concerning signs, including
rising corporate debt and shaky housing activity.
"The reality is the economy's going strong but there is an increasing
amount of yellow to orange flashing warning signs out there," said
Oliver Pursche, chief market strategist of Bruderman Brothers in New
York.
The market is not far removed from brutal declines stemming from the
1999-2000 Internet bubble and 2007-2009 financial crisis, and investors
are wary of the timing and extent of the next downturn. For example,
while the U.S. corporate tax cuts fueled equity returns in the past
year, some investors worry they eventually could result in a harder
landing for stocks.
"Putting in a late-cycle fiscal stimulus ... that really sets up the
potential for a boom-bust type of scenario,” said Mona Mahajan, U.S.
investment strategist at Allianz Global Investors.
The U.S. government has less firepower in a downturn after already
cutting taxes significantly, CFRA's Stovall said.
Meanwhile, the Fed's extraordinary efforts to foster an economic
recovery from the financial crisis through asset purchases and
rock-bottom interest rates have provided essential support for the
market during its bull run. So the central bank's slow removal of those
planks is now bringing uncertainty for stocks.
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Tourists gather around the Charging Bull statue, also known as the
Wall St. Bull, in the financial district of New York City, U.S.,
August 18, 2018. REUTERS/Brendan McDermid
Of the 12 bear markets charted by CFRA since 1946, the average drop has
been 32.7 percent. But the past two, stemming from the dot-com bubble
and the financial crisis, have been more severe: declines of 49.1
percent and 56.8 percent, respectively.
Still, there is skepticism that such an extreme move will be repeated.
"The last two bear markets have been two of the most extreme bear markets we
have ever seen. They can’t all be extreme," said Paul Hickey, co-founder of
Bespoke Investment Group.
CLEANSING THE BULL
The current bull market is commonly thought to have started on March 9, 2009,
when the S&P 500 closed at 676.53 as the United States grappled with the global
financial crisis.
Since then, the benchmark U.S. stock index has more than quadrupled, closing
Friday at 2850.13.
That makes it the third most-rewarding bull run, trailing only 1932-1937 and
1990-2000, the latter of which the current streak is poised to match in length
on Tuesday, according to S&P Dow Jones Indices.
There have been bumps along the way.
During this bull run, the S&P has had 16 pullbacks of at least 5 percent,
including four of at least 10 percent, according to Keith Lerner, chief market
strategist with SunTrust Advisory Services in Atlanta.
Since 2009, Yardeni Research has counted about 60 "panic attacks" - news-driven
declines of at least 1 percent for the S&P 500 when the market had been near
recent peaks.
The latest correction was the S&P's 10-percent swoon in February from the Jan.
26 record high, which Lerner called a "healthy reset of an over-stretched
market."
"Bear markets typically cleanse excesses in the market," Lerner said. "During
this bull market, we have had some pretty good draw-downs."
For a graphic on bull markets, see:
http://graphics.thomsonreuters.com
/testfiles/bull-run
Declines of 20 percent for the S&P 500, the standard definition of a bear
market, have predominantly occurred around a recession. Goldman Sachs tallied 12
pullbacks of at least 10 percent since 1976 that did not occur around a
recession, including the correction earlier this year. Only one of those, in
1987, turned into a 20-percent bear market decline.
While a recession - a period of significant decline in economic activity - is
not determined until after it occurs, the United States economy is expected to
grow by 2.9 percent this year and 2.5 percent next year, according to a Reuters
poll of economists. S&P 500 company earnings are expected to rise 23.3 percent
this year and another 10.1 percent in 2019, according to Thomson Reuters
I/B/E/S.
"The stock market attempts to discount the future outlook for the economy," said
Ed Yardeni, president of Yardeni Research. "So what the stock market is telling
me is there is no recession in sight."
(Additional reporting by Stephen Culp; Editing by Nick Zieminski)
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