On 6 March 2009, the S&P 500 hit a low of 666.79. That turned out to be a good omen, however. It marked the start of a bull market that turned eight last Monday, with the S&P gaining more than 250%. Wall Street usually sets the tone for world markets, so the equity market recovery from the global financial crisis soon spread beyond the world’s biggest economy. The current bull market is the S&P’s second-longest on record. But how much longer can it last?
“Bull markets tend to end with a final euphoric phase as the last doubters are sucked in,” as John Authers in the Financial Times points out. “This now begins to feel like a final phase – but not like the end of one,” he reckons. “This feels like 1997 or 1998, not like the top of the madness in 1999 or 2000.”
Sentiment is “ebullient”, if not yet hysterical, agrees Randall Forsyth in Barron’s. The latest poll of investment advisers by Investors Intelligence showed that 63.1% were bullish, the highest figure since 1987. Snap, the loss-making company behind social media application Snapchat, soared on its first day of trading, recalling the dotcom bubble – although at least it has a few hundreds of millions of dollars in sales, unlike many of its 1990s counterparts.
Another facet of markets reaching their final stages is that a handful of stocks are responsible for the index’s overall gains; a few mega-caps with premium multiples are now providing most of the momentum.
Confidence in the economic backdrop is growing steadily. The US economic recovery since the crisis has been pretty pedestrian by historical standards, but it has been going on for almost eight years now, longer than the average upswing since 1945. The data have strengthened in the US and overseas recently, and the prospect of interest-rate hikes in the US is being viewed as a vote of confidence in the recovery by the Federal Reserve, the US central bank.
For much of the post-crisis period, investors have been worried that dearer money would end a delicate recovery. Throw in the market’s growing tendency to ignore President Trump’s protectionist rambling yet count on his repeatedly heralded – but still vague – fiscal stimulus, and we have reached the stage where people are buying the US market simply because it is going up, according to Steve Sedgwick of CNBC in City AM. And we know how that ends.
With interest rates still extremely low, the rally is hardly going to end immediately, but long-term investors should still steer clear. The S&P’s cyclically adjusted price/earnings ratio has reached its 1929 high of 29 – a level only exceeded in 2000. Eye-watering valuations imply dismal long-term returns from here.