This Bull Market Was Born in the Depths of Financial Crisis
This Wall Street Bull market was born at the depths of a financial crisis, and it has just became the longest ever recorded.
Low valuations, little competition and EP/S growth that looked spectacular, but inline with historical trends, these were the forces that sent the S&P 500 up 320% over 3,453 days.
The Big Q: Is it over?
The Big A: Let’s us take a look at what powered the rally that just passed the dot-com era (1990-2000) suggests the ingredients for gains have not been disapated.
This Bull run is long because of the favorable environment, and a lot of the underpinning of that favorable environment is still in place.
Below is is a rundown of where these forces stand right now.
Starting with 1 of the cheapest multiples on record, the Bull owes a lot of its resilience to the fact that stocks have almost never strayed far from the historic norm relative to how much companies make in profits.
The S&P 500 traded below its average PE/R through Y 2015 and has since shown few signs of over valuations, apart from the few months leading up to the January highs. At 17.6X forecast income, the ratio is now slightly above the mean of 17X since Y 1990.
Fed Model aka low interest rates
The Bull case for equities got even more convincing when compared with the bond market. Thanks to years of efforts by the Fed to keep interest rates low to stimulate demand, “there is no alternative,” or TINA, has been Bulls’ mantra for stocks.
The argument is best illustrated by the so-called Fed Model, which compares the relative value of equities to fixed income. Going by that, stocks were a huge buy in March 2009, with S&P 500’s earnings yield sitting at more than 5% above the 10-year T-Note. While the advantage has now narrowed to 2%, it still shows value in stocks when adjusted for inflation, Treasuries have returned almost nothing over the past 5 years.
Helping market valuations stay in check is the earnings machine that has been running since the economy recovered from the global financial crisis. The growth rate is spectacular. At 9% a year, the pace of profit gains since Y 2009 exceeds the average of 6% a year since 1936.
If history is of any value the profit cycle is far from over. While every instance is different, a chart that plotted the peak of past profit cycles shows that corporate earnings currently sit roughly 30% below marks that would be seen too high to keep on.
The Bull market could have died if companies had not come to the rescue whenever investors bailed out at the 1st hint of trouble. Since 9 March 2009, corporate America has bought back $4-T of its own shares and doled out $3-T to stakeholders in dividends. That is about 33% of the total value that US stocks have added over the same frame.
While the use of cash has drawn some criticism, companies big and small are showing no signs of slowing, as President Trumps’ tax cuts have freed 100’s of billions of USDs.
|NYSEArca:SPY||286.156||22 August 2018||-1.14||286.25||287.31||285.71||67,271,900|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Bullish (0.26)||Neutral (0.08)||Bullish (0.33)||Bullish (0.38)|
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