Bull Market, Showing Some Age, Plods On

I’ve been meaning to discuss an interesting article in Monday’s Journal: Bull Market, Showing Some Age, Plods On.

What made it intriguing to me was the use of multiple factors, whose interplay could impact stocks simultaneously (sound familiar?).

I started with  E.S. Browning’s good market overview, and then edited it down into bitesize components:

Valuations: Price/earnings ratios still aren’t low by historical standards, but they are down from where they have been recently. By some classic measures, stocks have been getting cheaper. TO some, this suggests that they have room to rise. SPX index are trading at about 16 times future P/E (down from a 19 P/E in Jan 2005). 

Cheap compared to Bonds:  The Fed has tripled its target short-term interest rate, to 3%, since June, but bonds actually have risen in value since then, driving down the yield of the benchmark 10-year Treasury note to 4.3% from about 4.6%.

Interest Rates: The Elephant in the room is the Fed. Historically, when the Fed steps in to raise rates, it is moving to hold down inflation and slow economic growth. That tends to mean trouble for stocks.

The Economy: Data on the economy and corporate profits “remain strong.” Although investors have been bouncing between fears that the economy is either too hot or too cold, the bulls say it looks just right to them.

Corporate-profit Growth:  Along with the economy, corporate-profit growth has been slowing. But it, too, is better than many had expected. First-quarter profit increases for the companies in the S&P 500 are running at 14%, according to Thomson First Call. That is down from last year’s 20% clip, but well above the 7.6% expected when the year began, and above the historical average, which also is around 7%.

Investor Sentiment:  The bull aging, and that could be a problem. Since World War II, the average bull market has lasted a little more than three years. This Bull run began either October 2002 or March 2003. That suggsts that it nearing the end of what is its natural life span. Some believe most of the easy gains have already been made. Lately, a narrower group of larger stocks has been in the lead, typically a sign that the bull market is getting old.

Market conditions leading up to yesterday’s selloff including decreasing volume on each subsequent rally day, with narrowing breadth (advbance/decline). That is hardly the sign of a healthy market.   

The WSJ noted that "Unusually, corporate profits actually have risen more rapidly than
stock prices for much of the current bull market, which began in
October 2002."  As we mentioned last week, there is little correlation between a single variable and market performance.

click for larger graphic


Graphic courtesy of WSJ

Note that as GDP momentum has decelerated, it has made Market progress more difficult. The same applies to year over year quarterly earnings gains — the momentum continues to fade.


Bull Market, Showing Some Age, Plods On
Investors Keep Eye on Fed Rates Despite Strong Three-Week Run;
‘Time … to Go Back to Basics’
By E.S. Browning
The Wall Street Journal, May 9, 2005; Page C1

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  1. Jay S. commented on May 11

    Bull markets don’t die because 3 years are up. Besides, why would people go all the way back to 1945 to look at bull markets? The fundamentals were different back then: the $ was backed by gold, we had balanced budgets, we had politicians trying socialism, 90% marginal tax rates, minimum foreign competition, we had the period of great inflation from 1965 to 1980 etc.

    The average bull market means ….nothing. The reason I look at each bull market to understand why it occurred, why it died, etc. The last bull market lasted from 1994 to 2000, with a dip in 1998 due to Long Term Capital Management and the Asian contagion. This bull market was destroyed because of Greenspan, he gave us too much money 1998-2000 and too little money 2001. Remember the stupidity of the government thinking the world would end at midnight 2000.

    Bull markets die because the fundamentals change. Look at what the politicians are doing, or Greenspan. Does the market go up and down with rising/falling Fed Funds rates. Yes according to the Fed San Fran Economic Review 1997, No. 2. Booth & Booth. But once again they went back to 1954 and the Fed Funds rate was 5.5% in the expansive periods and 6.9% in the restrictive periods. Hardly our situation. Their averages said during the restrictive periods the large caps fell –0.125%/month and small caps went up +0.01%/month.

    Greenspan is still accommodative look at year over year Monetary Base growth minus real GDP, it is still positive ~ 1.2%. On December 1999 it was + 11.5% and on December 2000 it was –4.7%

    Ps – concerning the GDPr momentum falling, the BEA says GDP is worst then +/- 1.1%, therefore last GDPr was between 2.% and 4%. Therefore how can anyone tell where its going. Also the Fed shoots for 3.5% GDPr growth. So why don’t you conclude the GDPr is at cursing speed until Washington DC screws it up?

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