7 Reasons this Bull Market has a Few Years Left to Run
Below are just a few of the many reasons why I think stocks will go higher (substantially higher) before this bull market ends. It’s been a question (Is the bull market over?) that I’m starting to get more and more…so I thought I would put the top 8 reasons why I don’t believe it is.
- The fiscal component. This bull market converted from a rally that was predominately driven by monetary policy (low rates, bond purchases through stimulus) to a fiscally driven market (meaning earnings) in late 2015. Generally, I feel that the fiscal component to bull markets can run for anywhere from 5-10 years.
- The report cards are coming in. Last week (the busiest week for earnings) around 35% of the S&P 500 reported. Of that according to CNBC, 77% beat earnings expectations and 73% beat revenue numbers. The take away here is that ultimately it all comes back to earnings. Q1 year over year was 26.83%. Yes, you need to give a lot of the credit to the tax cuts. However, I’ve consistently said that companies will figure out a way to make money in any environment. You just need to give them some certainty on the political landscape, so they can make decisions.
- Corporate Cash on Balance Sheets. We are still at historical highs with cash on balance sheets. Since the end of 2013 companies have hoarded somewhere around 30% of their net worth in cash earning near zero. Now granted I acknowledge that a good portion of that was driven by regulation on the financial stocks who were forced to “shore up” their balance sheets, however that still leaves several organizations with cash that is ready to deploy. The choices for the deployment are Cap Ex (New factories and/or equipment), M&A (Mergers & Acquisitions), Dividends (Either one off special dividends of increases) or Share buybacks. Any of these I believe are ultimately good for investors and the overall stock market
- Charts can be deceiving. It’s easy to look a 10 to 20-year chart and assume that we are ready for a pull back. Charting (or Technical Analysis is 100% correct after the fact). Yes, as I’m sure you know I give about as much credence to reading charts to determine a stock (or markets) next move as I do reading tea leaves or flipping cards. Now I couldn’t blame you for looking at the next chart and wanting to hide under the table.
…That is until you see the big picture.
That’s not to say that there weren’t some downturns, like the 87 crash in the midst of the 83 to 2000 run, but as you can see, it did not dampen what was a 20-year bull run.
- Multiples. The latest bout of earnings and relatively flat market so far this year (when you compare what we expect to be 25% year over year earnings growth in 2018) has pulled back the market to close to a P/E that is touching its 25-year average. I still argue that the multiples for the current market should be around 20% higher than the 25-year average due to two reasons. There are more growth companies in the index now than ever before, and there are more companies selling intangibles than tangibles than ever before. What does that mean? You pay more for a growth stock than you do for a value stock. You’re paying for the expected growth that you believe will come in the next many years. So, if the index has more growth orientated companies in it, that sell services, rather than products (with a much-reduced overhead) then by nature the P in P/E should higher.
- The consumer drives the U.S. economy. It’s commonly known and where ever you look you’ll find that the consumer generates around 70% to the total US GDP. Total GDP for this year is close to $21 Trillion The Bureau of Economic Analysis (a Division of the Commerce Department) is getting ready to publish its revised numbers for last year. This is generally done at the end of July each year, and from all reports the revisions will be minimal at around 2.6%. That said a healthy consumer should be good for the growth of the overall economy. Well to that extent, U.S. households have the lowest debt service ratio going back over 30 years and households net worth is at all-time highs.
- We’re not euphoric. The last point, which is still the one I quote the most from the late great Sir John Templeton is that Bull Markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. Sir John who started his mutual fund company in the 1950s was dubbed one of the best stock pickers of his time. His Templeton growth fund still has one of the most impressive records when measured against peers. This is the beauty of capitalism, it brings out our animal instincts. Just like you can predict migration patterns, humans when it comes to personal gain are predictable. I don’t believe we are anywhere near euphoria. The euphoric phase is when you get in because you feel to stay out would be suicidal. For some recent examples. Think about Bitcoin (from 6000 – 20000) in a couple of weeks. Or Miami real estate in 2007, where speculators were putting deposits on buildings they had no intention of ever finishing building. Even yours truly wanted in on the action.
I have a few more (many more) reasons that I believe this is part of a 20-year bull run from the market lows of 2008, but I’ll keep some of this for future articles.
Here is the buy sell
As always should you have any questions or concerns, please don’t hesitate to call.
Opinions expressed are those of Mick Graham and are not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. It has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no assurance any of the trends mentioned will continue or forecasts will occur. All investing involves risk and you may incur a profit or a loss. Asset allocation and diversification does not ensure a profit or protect against a loss. Past performance does not guarantee future results. There is no assurance that any strategy selected will be successful. Dividends are not guaranteed and a company's future ability to pay dividends may be limited. Indices are not available for direct investment. A person who purchases an investment product which attempts to mimic the performance of an index will incur expenses such as management fees, transaction costs, etc. which would reduce returns. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Price to Earnings (P/E) is the share price divided by the trailing / projected four quarter’s earnings per share results. Forward P/E is the price to earnings ratio of the next four quarters - the current price divided by the estimated future earnings. If the next four quarter's earnings are all in the same fiscal year, the annual figure is used instead. Price to Book (P/B) is the current share price divided by most recent book value, where book value is viewed as the worth of a company if it were liquidated. Price to Cash Flow (P/CF) is the current share price divided by cash flow per share for the most recent twelve months. The Earnings Yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The CAPE Ratio (Shiller P/E Ratio) is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. Dividend Yield is a measure of the income generated by a security divided by the price of that security as of a given date. Calculations may vary depending on the manner/frequency of payment. Standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns. Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
