Why This Bull Market May Be Far From Over

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by: Investment U

By Alexander Green, Chief Investment Strategist, The Oxford Club

The Dow sailed through a big, round number last week: 23,000. Its fresh high Wednesday marked the most records for the index in a calendar year since 1995.

This is now the second longest-running bull market in U.S. history. The question on everyone's mind, of course, is "How much longer can this go on?"

And while I argued in Friday's column that it is always better to anticipate bear markets than react to them, my answer to the question above is, "longer than you might expect."

Several factors bode well for stocks right now. We are enjoying globally synchronized economic growth, low inflation, rock-bottom interest rates, cheap energy and strong corporate earnings.

The prospect of tax reform - or at least a significant tax cut - is also boosting stocks.

(And putting a damper on bond prices. The 10-year Treasury yield hit 2.38% Friday, the highest close since July.)

Moreover, calm has descended on the markets as if Federal Reserve Chair Janet Yellen just intoned, "Let us pray." The CBOE Volatility Index - or VIX - recently closed at its lowest level ever.

There are warning signals too, however.

Valuations are stretched. The S&P 500 currently sells for 20 times the consensus earnings estimate for the next 12 months.

But you could argue that with yields so paltry - and growth heating up - stocks deserve to trade at a premium.

There are also concerns that Big Money is too optimistic. Barron's reports that 61% of recently polled professional money managers describe themselves as "bullish" or "very bullish."

This is a contrarian indicator since unloved bull markets generally have more fuel left in the tank. (It's when everyone agrees that stocks have nowhere to go but up that you need to cup your groin.)

Yet the average investor has largely missed this nearly 9-year-old bull market - and those who have been in are getting out.

According to EPFR Global, investors yanked $36 billion out of U.S. stock mutual funds and ETFs in the third quarter. In fact, more money has flowed out of than into equity funds this year, even as the market has hit more than 50 all-time highs.

If it weren't for foreign investors, sovereign wealth funds and share buybacks, stocks would be flatlining.

Large cash holdings mean there is still plenty of money left to come into the market and drive indexes higher. When you consider today's micro-yields and the negative sentiment of the odd-lotters, it's a positive for stocks.

Legendary investor John Templeton famously said that bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria.

It appears that we are still stuck at skepticism.

And the "senior citizen" status of the rally is irrelevant. History shows that bull markets do not die of old age. They are killed by economic slowdowns, excessive Fed tightening, inflation or disappointing earnings.

None of those appear to be in the offing.

Of course, the market remains vulnerable to a geopolitical crisis or some other bolt out of the blue. But that is always the case.

Maybe the skeptics - by emphasizing the length of the economic expansion and bull market - are focusing on the wrong thing. Perhaps they are neglecting the unprecedented weakness of the nine-year economic recovery.

Ordinarily, sharp economic contractions - like the Great Recession we just experienced - lead to robust recoveries.

But we've had the opposite. As you've surely heard, this has been the weakest economic recovery since the Second World War.

So it's possible that rather than this being the late stages of a recovery, the economy is only just shifting into second gear. That would mean substantial corporate earnings growth is still ahead.

I realize that virtually no one is saying this right now. And that makes me wonder if it might actually be the case.

If, in several months or a few years, it becomes the conventional wisdom, that would be the time to pare back on stocks.

But for now, the trend is your friend.

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