Even an optimist like me can see that this bull has gotten a little long in the tooth. On average, cyclical stock market recoveries have lasted less than five years. This one began in March 2009, so it is now entering its fifth year. But averages can be deceiving. The range of past bull markets is as short as two years and as long as nine years. So in spite of its notable longevity, the current bull has a ways to go to set new records.
Importantly, the fundamental forces that drive cyclical fluctuations in stock prices continue to be very positive. Not all market commentators agree. There is a widely held view that stocks have been propped up by the Fed’s pumping money into the economy through its three quantitative easing programs. On a recent financial news program, the anchors and all five panelists were unanimous in agreement that it was all QE that had pumped up stock prices to new highs.
Such a myopic view ignores the fact that monetary easing always plays a role in bull markets. Moreover, the Fed’s printing presses are not just inflating stock prices artificially. Monetary easing boosts real economic activity though multiple channels. In time, that raises corporate earnings and dividends, which in turn increases the valuation of the enterprises. Earnings have already more than doubled from the 2009 trough.
To be sure, the recent GDP picture has been murky. Just last week, the Commerce Department reported first quarter 2013 GDP growth of only 2.5%. But the headline number softness was mainly due to a drop in defense spending, offsetting unexpected strength in consumer spending, which grew at a 3.2% annual rate. Also, up until recently, this economic recovery has been missing the positive effect of a cyclical rebound in housing which historically adds over a percentage point to annual GDP growth at the start of an expansion. That extra boost is just kicking in now in the fourth year of the economic recovery.
Meanwhile, stocks are at new highs and home prices are rebounding strongly. As the wealth effect of rising household net worth boosts sentiment, consumer spending will continue to surprise and earnings estimates for the broad market averages will get raised. I think the S&P 500 will earn about $110 per share this year. So at roughly 1600, the S&P is selling at just 14.5 times that number: this exceptional bull is NOT overvalued and could rise some 10% further over the balance of the year.
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Joe McAlinden, CFA
Chairman and CEO
McAlinden Research - a division of Catalpa Capital Advisors, LLC