John Lynch Chief Investment Strategist, LPL Financial
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The bull market will celebrate its ninth birthday on March 9, 2018. During that nine-year period, the S&P 500 Index nearly increased fourfold in value including dividends, producing a total return of 385% (19.2% annualized) while rising almost 300% in price. The recent market volatility, driven by fears of tariffs, inflation, and monetary policy, has many wondering if this is the end of the road for the bull market. So how much might the current bull have left in the tank? Given that we are not seeing the warning signs that have historically signaled the ends of past bull markets, including excessive equity flows and activity in initial public offerings and mergers and acquisitions, we would not be surprised if the current bull market celebrates its record tenth birthday next year. This week, we look at some of our favorite bull market indicators and the signals that accompany them.
Historical Perspective
On March 9, 2009, the S&P 500 closed at 676.53, which was the low close for the worst bear market in stocks since the Great Depression. Few believed it possible at the time, but at 109 months old, the current bull market now ranks as the second longest since World War II, with only the 1990s bull market seeing larger percentage gains.
Although many might feel like this bull market did nothing but go up the full nine years, remember that the S&P 500 was essentially flat during calendar years 2011 and 2015, each experiencing corrections of 19% and 14%, respectively. Not to mention the fastest 10% correction from new highs ever (nine days) that took place last month.
It is notable that at the same stage of the 1990s bull market, the S&P 500 was up 344% on a price basis (compared with the current bull, which is up 297%), before moving up to a 417% gain at its peak about six months later. Will this bull market end in six months—or will it make it to its next birthday?
It’s Not Over ‘Til “The Overs” Say So
We don’t believe bull markets die of old age; they die of excesses, and we aren’t seeing the same type of overspending, overborrowing, or overconfidence we’ve seen at other major market peaks. The LPL Research Over Index is a proprietary indicator we use to monitor the accumulation of unhealthy excesses in borrowing, confidence, or spending. These excesses are what have historically ushered in bear markets, and currently, we are not pushing the limits on our overall index or subindex components. The LPL Research Over Index, along with other factors, leads us to believe that we are likely past the midpoint, but not at the end, of this economic expansion and bull market.
Index of Leading Economic Indicators
Turning to one of our favorite signals to gauge the bull’s health, the Conference Board’s Leading Economic Index (LEI) has historically provided early warnings of recessions and the start of bear markets. Specifically, when the year-over-year change has turned from positive to negative, a recession has typically followed within the next 14 months. The latest reading for January 2018 rose 6.2% over the past 12 months, signaling a low probability that a recession will cause a bear market in the next year.
The LEI, which gives a good snapshot of the overall health of the economy, is an aggregate of 10 diverse economic indicators that have historically tended to lead changes in the level of economic activity, including data on employment, manufacturing, housing, bond yields, the stock market, consumer expectations, and housing permits. Considering its breadth of data points, we’ve grown to rely on its predictive capabilities.