With all-time-high stock prices and the recent October volatility, investors are asking us if they should be concerned about the equity market. Is it a bubble? How long can it last?
First, let's compare this market cycle to several predecessors. Since 1871, 15 other bull
markets, averaging 68 months in length and 183% in gains. Today, we are at those averages: 68 months into this cycle, the S&P 500 has gained 198% since its recessionary low in 2009 (source: Shiller 2013, JP Morgan).
Is it time for the bull to go to pasture? We say, "Not yet." Following are five reasons why we think the domestic stock market still has room for growth:
- Underlying the all-time-high stock prices are record corporate earnings and profits, which have been climbing for the majority of the last two years. These profits are primarily driven by revenue (sales), not by cutting expenses or issuing shares, which points to real growth.
- Low interest rates are favorable to stocks.
- Collectively, companies are holding large cash reserves, and we expect corporate investment from these reserves to increase, which should further spur production and earnings.
- Equity price/earnings (P/E) ratios are used to assess how stock prices compare to the underlying profitability of the company. Currently, P/E ratios are near 25-year averages, not near the peaks of recent bubbles. This suggests stocks are not overvalued even though they are at all-time highs.
- Fund flows into equities propose that this rally has been primarily driven by institutional investors—the average investor has barely ventured in. And, unfortunately, the average investor frequently moves money into the markets at exactly the wrong time.
While we may experience some volatility (it's now part of our new norm), we don't expect this to alter the market's long-term course. We're not looking for the end of the bull market yet. It's more like the sixth or seventh inning of a nine-inning game.
Read more about our market, economic, and asset allocation forecasts in our latest white paper.
Cheers to your fiscal health.