Anniversaries are as much about reflection as celebration. A few weeks ago, the current bull market celebrated its sixth anniversary, making it one of the longest in history. Over the past six years, this stock market rally has been distinguished not only by its longevity, but also by its magnitude. U.S. stocks are up more than 200% from their March 2009 lows. This has left everyone wondering: "When could it end?" My view is not yet, and probably not until at least next year.
The longevity of the rally matters, but media headlines may be overstating its importance. Bull markets do not "die of old age". Typically they end due to some combination of excessive valuations, turn in the business cycle or change in monetary conditions. So far, these factors suggest this bull market can continue.
- Valuations are high, not outrageous. I wouldn't argue that U.S. stocks are cheap. Looking at longer-term metrics, notably the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, U.S. equities are expensive. At the very least, this suggests below average returns over the next five years. That said, with the S&P 500 Index trading at 18x trailing earnings, valuations are below the typical market peak of the past 30 years. And the U.S. is by far the developed world's most expensive equity market. Outside of the United States, most markets are trading at or below their historical average.
- Few signs of a recession. While first quarter growth has been disappointing, this is arguably a function of a brutally cold winter and a west coast port strike. And even if you ignore these exogenous factors, recent data is still not consistent with an imminent recession. Assuming the U.S. economy follows a similar pattern to last year, I expect some bounce back in the second quarter. Longer-term factors also support the argument that the recovery will continue. For instance, economic recoveries are getting longer, suggesting that this one still has further to go.
- Monetary conditions will stay accommodative for the foreseeable future. Even assuming that the Federal Reserve (Fed) does raise rates this fall, the Fed is highly unlikely to adopt an aggressive, linear tightening cycle. A prolonged period of low U.S. rates combined with even lower rates in Europe and Japan suggest that tight monetary conditions are unlikely to derail the bull market anytime soon.
So when could this bull market end? My best guess - and the uncertainty surrounding these types of predictions means it really is a guess - is sometime between 2016 and 2017. That is when changing U.S. monetary conditions are likely to impact both company fundamentals and investor psychology. Obviously an exogenous shock could, and would, end things sooner. But for now, the odds favor at least one more anniversary for this bull market.