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Second-longest bull market ever aging gracefully, but investors wonder how long it will last

  • Since the prior bear market ended in March 2009, this advance in equities is now the second-oldest on record without at least a 20 percent drop in the S&P 500.
  • The current trailing 10-year annual return for the index is only 7.6 percent. At previous major bull market peaks, this 10-year annual pace has routinely been above 15 percent.
  • There aren't many worrisome stresses in the capital markets at the moment. All asset classes appear similarly stretched in valuation – yet rationally valued in relation to one another.
Eduardo Munoz | Reuters

"Age is just a state of mind" is a laugh line in the geezer comedy "The Expendables" and a wan Hallmark-card slogan. But it also captures the sentiment of an investment scene dominated by talk of the "aging bull market" in stocks.

At 8½ years since the prior bear market ended in March 2009, this advance in equities is now the second oldest on record without at least a 20 percent drop in the S&P 500.

And the appreciation in prices across asset classes has most investors talking about "high valuations" today and "muted returns" in years to come, given the "late-cycle environment."
These were themes running through Tuesday's Delivering Alpha conference presented by CNBC and Institutional Investor.

Long-tenured hedge fund manager Leon Cooperman of Omega Advisors called the stock market "fully or fairly" valued, dependent on 4-5 percent earnings growth plus dividends in coming years.

But, he added, "the conditions that normally lead to significant market decline are either not present or not forecastable," including an oncoming recession, a hostile Fed, dangerous inflation, investor exuberance, speculative valuations or a geopolitical shock.

When asked about the Massachusetts Pension Reserves Investment Management fund's 7.5-percent annual return target, its chief investment officer, Michael Trotsky, said:

"I've been very clear when it comes to my constituents, in that for the next five to seven years I don't think our portfolio is likely to return that. It's a bit hypocritical because for the past three and five years, we've returned over that. But I view it as kind of borrowing from the future. We've all talked about equity valuations in particular being fair. You can argue whether they are overpriced or underpriced, but everyone in the room can at least agree they are fairly valued. So it's going to be more difficult."


Credit hedge-fund founder Boaz Weinstein of Saba Capital, added: "The reward isn't there" in high-yield bonds — an asset class that often leads equity markets and is now widely owned by retail investors craving scarce income.

So, there's broad agreement that markets have been generous for a pretty long time and the trees are stripped of the low-hanging fruit.

Still, saying the bull market is getting on in years and might be slowing down doesn't mean it must end soon or is through having fun. Today's 70-year-olds have achieved the biblical life span, and when they were born in 1947, life expectancy for Americans was under 70 years. Yet a 70-year-old right now can expect to live 15 more years.

And for as old as this bull is, it has proceeded at a fairly measured pace. The S&P 500's annualized total return since the depressed March 9, 2009, launch point has been 17.5 percent — quite healthy but not particularly excessive by the historical standards of bull-market gains.

What's more, the current trailing 10-year annual return for the index — which stretches back to just before the 2007 precrisis peak — is only 7.6 percent. At previous major bull market peaks, this 10-year annual pace has routinely been above 15 percent.

An exception to this was the 2007 peak, when it was roughly the same as the current level. And it wouldn't take much upside from here to make that 10-year record look pretty good. If the S&P were to climb just another 10 percent in the next 18 months, the 10-year trailing return will exceed 15 percent by the time we hit the 10th anniversary of the 2009 bottom.

Everyone knows this math, and all investment professionals can see that stocks look rather rich by most fundamental measures, which is restraining their enthusiasm and making many reluctant buyers.

This week, Goldman Sachs strategist David Kostin felt moved to answer clients' constant calls for a market correction with the case for why one was unlikely (sturdy consumer trends and investors' own caution). The monthly Bank of America Merrill Lynch global fund manager survey showed above-average fund cash levels and the highest incidence of downside hedging in 14 months.

There aren't many conspicuous distortions or worrisome stresses in the capital markets at the moment. All asset classes appear similarly stretched in valuation — yet rationally valued in relation to one another.

This is a world of 1 percent Fed-determined short-term rates, 2 percent 10-year Treasury yields, a 2 percent S&P 500 dividend yield, 3 percent corporate bond yields, 4.5 percent "free cash flow" yield on stocks and 5.5 percent junk-bond yields. Not exciting, hard to get excited about, perhaps insufficiently compensating for risk. But nothing says it must end soon, or what will come along to disturb that arrangement of asset-class orbits.

Ed Clissold, chief U.S. strategist for Ned Davis Research, believes the "mid-cycle earnings recovery" we've seen this year presents a risk heading into 2018. Past cycles suggest these profit revivals peter out after about a year and stocks can struggle once earnings-growth rates peak.

Doug Ramsey, CIO of Leuthold Group, has been bullish since the early-2016 correction abated but remains wary of the market's staying power. "We believe this bull market still has legs … but so might the mini-correction that's hit mainly the secondary stocks so far," he wrote to clients last week, before the S&P 500 blipped to a slight new all-time high in recent days.

He grants that market uptrends don't expire based on the calendar, but suggests investors also are not entitled to generational advances of the '80s-'90s type.

"It's commonplace for stock market bulls to observe that cyclical 'bull markets don't die of old age.' Maybe not," Ramsey said. "But if age doesn't matter, will they also acknowledge that 'not all secular bulls last 18-20 years?' Very doubtful."

It's a debate we might be having for some time to come, as long as this bull keeps aging gracefully.