- The bull market becomes the longest in recent history Wednesday, by some measures, and strategists expect it to continue running for now, driven by a strong economy and solid earnings growth.
- Not all strategists agree how and when to measure the bull market's run, but even so it has prompted a debate about what types of things could mean an end to the bull market — and one of the biggest is the Fed.
The U.S. stock market could soon lay claim to being in the longest bull run in modern history, and it is more likely to power on than fizzle as it heads toward its golden years.
For many strategists, the current bull market started its life after the wrenching trip to the bottom on March 9, 2009, one of the darkest moments of the financial crisis, when the S&P 500 touched 666. Since then it climbed to a high of 2,872, in January, and still holds above 2,850, for a gain of more than 320 percent.
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On August 22, the bull market turns 3,453 days old— putting it one day beyond what is now the longest bull market, which ran from October 1990 and ended with the bursting of the tech bubble in March 2000.
"From our perspective, there's still room to run. ... We're positioned for the continuation of the bull market. We do think we're late cycle," said Daniel Suzuki, portfolio manager at Richard Bernstein Advisors.
The current bull market has been called the most unloved at many stages in its nine-year life. But now, it is facing record earnings and the best stretch of economic growth yet. Those are two key factors for market gains, and they are in place at the same time the Federal Reserve removes some of the easing it instituted to create liquidity and encourage investors to buy riskier assets, such as stocks.
"This probably will end up being the longest bull market ever. We are very focused on three things — profits, liquidity and sentiment — and all these things today are actually quite supportive," said Suzuki.
"Profits outside the U.S. have started to show clear signs of slowing, but the U.S. profit cycle continues to be very strong. It's actually the best earnings season on record," Suzuki said. "That's one big reason the market is back up above 2,800 after selling off earlier in the year. ... Underlying fundamentals are still very healthy and across all sectors. It's not just one sector driving it."
The economy is also being buoyed by corporate and individual tax cuts, which appear to be encouraging spending. In the case of corporations, it's encouraging capital spending and a record pace of stock buybacks, both fuel for stock prices. The economy grew at 4.1 percent last quarter, its fastest pace in four years, and is expected to grow by 3 percent or better in the second half.
"There are major positives on the fundamental side. That's why we think this bull market is not at the finish line ... it's between second and third base," said Ryan Detrick, senior market strategist at LPL Financial. "We had a 19.4 percent correction in 2011, and the average stock in February 2016 was down 25 percent. ... You can make some argument that we had two major corrections along the way." In 2016, the S&P declined about 14 percent.
What will end it?
While strategists agree the bull market is not over, they don't know what will ultimately kill it. They do say the Fed could tighten too much, the economy could slump or trade wars could intensify, chill demand and hurt earnings. Emerging markets, already stung by a rising dollar, could topple with Turkey and chill the world economy.
The Fed is expected to raise interest rates two more times this year and three times next year. Strategists say its tightening could lead to an inversion of the Treasury yield curve, or an event where short-term yields, like the 2-year, rise above the yield on the 10-year. That is a reliable recession warning, but analysts say the stock market has continued to rise until months after the curve inverts, in some cases.
"The Fed, in my guess, is going to keep hiking until something in the financial markets breaks," said Joseph LaVorgna, Natixis chief economist, Americas. He said that could result in a higher dollar, which has been weighing on emerging markets. "If there's a recession, for argument's sake, in the next 24 months, the equity market should do reasonably well from months one through 19. That's going to make everything feel better, but I think you should be cautious here."
LaVorgna said the Fed could create a tightening of financial conditions, then get concerned about it and pull back from raising rates. That could spur the final leg of the bull market. "The Fed, not seeing any economic damage, resumes its tightening path and then tightens us into a recession," he speculated.
For a bull market to end, the stock market would have to decline by 20 percent or more. Not everyone believes the bull market should be measured this way, though. Sam Stovall, chief investment strategist at CFRA, said the market can't be called the longest bull until it sets a new all-time high on or after Aug. 22.
'Secular bull market'
Jeff Saut, chief investment strategist at Raymond James, takes issue with the way bull markets have been measured, past and present. He said the tech bubble bull market of the 1990s is much longer than some say, since he measures the start of the bull market back to the summer of 1982, when the market traded above its previous high.
Either way, this bull market has a ways to go, he said.
"I think we've got years and years. ... That's the nature of a secular bull market. They tend to run 14-plus years. They tend to compound at 15-plus percent per year," Saut said. He said the market could be at risk from a policy error on the part of the Fed or a jump in oil or even a geopolitical event, like a new issue with North Korea.
S&P 500 bull markets since WWII
While the current bull market is distinguished by the fact that it has still not been truly embraced, the Bank of America Merrill Lynch monthly fund managers survey shows investors are the most bullish on U.S. stocks in three years.
There have been pockets of hot names that investors couldn't live without, such as Apple or the FANG names Facebook, Amazon, Netflix and Google parent Alphabet.
But strategists are so far undeterred and most see the market heading higher this year, though growth in earnings and the economy may be slower next year, according to a number of forecasts.
Detrick said he expects to see the S&P up single digits this year. When the S&P reached 3,000, he said he would re-evaluate.
"We do think this time next year, we'll be in a bigger secular bull market. Tech is just right around where it was in 2000. Financials, on a relative strength basis, are still lagging. There are some areas that have room for significant growth in price," he said.