The bull market is older than most, but the slow recovery may, ironically, let the fun last a while longer.
While the market isn’t nearly as cheap as it was four years ago, the price of stocks when compared with the previous 12 months of earnings still trails the long-term average, as well as the heights reached when previous bulls have come to an end.
Industrial production has increased since the recession ended in 2009, but output is still not even back to pre-financial-crisis levels. So businesses can keep growing without big capital expenses.
As investor confidence grows, overspending and overborrowing are typically byproducts of an aging bull market. Since the financial crisis ended, though, prudence has been in fashion. That, combined with record low interest rates, has pushed average household monthly debt payments as a percentage of disposable income to the lowest level since the 1990s. Should the economy improve, consumers have the means to ramp up spending.
Another gauge of exuberance is housing starts. Last year the number of new homes being constructed in the U.S. rose sharply as the real estate market finally began to stabilize. But annual housing starts were still only about half the long-term average. Says Stephen Auth, chief investment officer of equities at Federated Investors: “We’re not even getting going yet.”
What’s the most common reason a bull market comes to an end?
“The Federal Reserve raises interest rates and slows the economy” to prevent inflation from overheating, says Richard Skaggs, senior equity analyst at Loomis Sayles.
Today there’s little risk of such hikes. Slow growth (the U.S. economy actually contracted slightly late last year) has kept a lid on energy prices, hiring, and salaries — and that’s unlikely to change soon. As a result, the Fed plans to keep rates at or near record lows through at least 2015.
In the midst of a bull market, most stocks get a lift. As rallies mature, however, the gains tend to become less evenly distributed.
An index such as the S&P 500 may continue to rise, but fewer companies within the benchmark actually power the advance. Analysts watch the ratio between winners and losers for signs that a bull is nearing an end.
Above, you’ll see that in early 2007, Bloomberg’s S&P 500 advance-decline index, which tracks these trends, began to flatten out ahead of the 2008 stock market crash. The index then began to rise sharply just before the start of the March 2009 bull market, and it has yet to stall.