5 reasons why six-year bull market can continue

Allen Wastler | CNBC

With the bull market in its 75th month of existence, investors are growing wary. They're not sure of what exactly, other than the assumption that stock market rallies are just not supposed to last this long.

In the last 50 years, one bull did survive a decade without a 20 percent bear interruption: the dot-com-fueled boom from 1990 to 2000.

But bears will argue an Internet-like revolution is not happening now to warrant that kind of sustained gain.

Bank of America Merrill Lynch sought to assuage clients by giving them five reasons this bull market will fight on. Here they are with accompanying evidence from other notable market seers.

Savita Subramanian, equity and quant strategist at Bank of America wrote the following in a report to clients Tuesday.

"There is no magic number of years at which bull markets expire. Bull markets have averaged five years, but have varied in length from two years to as long as nine. Growth, sentiment and other factors matter far more than an arbitrary time period. On business cycles, our economics team notes that recoveries have been getting longer over time, and the current lack of excesses (asset bubbles, overexpansion of cyclicals, high inflation) don't suggest an imminent contraction."

The reasons included in the report are:

  1. New bull markets tend to extend much higher than the peak of the previous bull. Right now, the S&P 500 is about 30 percent higher than its 2007 top, but the average "peak-to-peak" gain is 75 percent, according to Merrill.
  2. This bull market is still so hated. Wall Street strategists, on average, recommend putting just half of your money in equities. At previous highs, this crowd said you should have a 60 percent allocation to stocks.
  3. The economy is just hitting its stride. Total GDP is just 9 percent higher than the top of its last cycle, when it typically grows by 50 percent during a bull.
  4. Inflation is still too low ... in fact, it's falling now. Every bull market ended with much higher inflation levels.
  5. Balance sheets are strong. Total debt among S&P 500 companies is just a third of their market capitalization, according to the report.

Raymond James' Jeff Saut had this to say about the report's analysis:

"In past missives I have noted that since the 2008 Financial Fiasco was so severe it likely will lengthen the typical mid-cycle recovery suggesting the normal business cycle will be elongated. That strengthens Merrill Lynch's thesis, as well as my sense that the month of May will see a resurgence of economic growth as the weather turns more favorable."

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The money play:

Jonathan Golub of RBC Capital Markets made the case that bull markets don't die of old age in a February report:

"Our research suggests that bull markets don't falter because they become tired or expensive; they end when recessions ensue. We believe recessionary risks are particularly low."

So Golub is putting the pedal to the metal with a technology and financials "overweight" recommendation. And, in turn, recommends underweighting utility and telecom stocks.