How Much Longer Can the Bull Market Last?
One market strategist with a superb record is still bullish but sees increasing danger signs.
Jim Stack is a nervous bull. The editor of InvesTech Research Market Analyst is advising subscribers to keep a reasonably high 82% of their investments in stocks. But he thinks it’s late in the game for this bull market. “It’s at least the seventh inning, and it might even be later,” he says.
Stack is well worth listening to—even if, like me, you doubt that anyone can successfully time the stock market. He called the start of the 2007-09 bear market almost to the day. And he turned bullish shortly after the March 9, 2009, bottom I based a piece that appeared March 10, 2009, on his optimistic view). Over the past ten years through October 31, his newsletter recommendations returned an annualized 10.2% compared with an annualized 7.5% for Standard & Poor’s 500-stock index, according to the authoritative Hulbert Financial Digest.
Stack, who is located in Whitefish, Mont., bases his prognostications on a combination of economic indicators and technical factors—that is, the actions of the stock market itself. Right now, some of his indicators are flashing green but others are flashing yellow or red. Says Stack: “These are not the easiest or most comfortable times to invest.”
Nevertheless, absent evidence to the contrary, Stack believes in giving a bull market the benefit of the doubt. Why? Because the market historically rises about two-thirds of the time. That stance helped him stay invested throughout the 4½-year-long bull market, which included an 18.6% correction in Standard & Poor’s 500-stock index in 2011 during the debt-ceiling standoff. (For all of 2011, the market returned 2.1%.)
Stack sees some important economic positives for today’s market. The Conference Board’s Index of Leading Economic Indicators shows an economy that’s growing, albeit slowly. So do the Institute for Supply Management’s reports on activity in both the manufacturing and service sectors of the economy. Slow growth means there’s little inflation danger and little risk that the Federal Reserve will need to raise interest rates to slow inflation. To the contrary, the Fed is committed to keeping short-term rates near 0% at least into 2015.
On the negative side for the economy, consumer confidence declined in November, perhaps due to the gridlock in Washington and the problems with Obamacare. “With the holiday season just around the corner, it’ll be important for sentiment to rebound from these lower levels,” Stack says.
The market’s technical health is also mixed. On the plus side, all the major stock indexes recently hit new highs. But Stack says the advance/decline ratio—the number of stocks rising compared with the number of stocks falling—isn’t rising as rapidly as the major indexes. That’s a worrisome sign. What’s more, Stack notes, an index of bellwether stocks that tend to lead the overall economy is likewise not rising as fast as the major indexes.
Overhanging all of this are concerns about what the Fed will do. The central bank will probably begin tapering its $85-billion-per-month bond-buying program early next year. When that happens, bond yields will almost certainly rise. The big question, for Stack and many others, is: How much? A ten-year Treasury bond yielding 3.25% would present a big obstacle to stocks—unless economic growth was accelerating. (The ten-year Treasury yielded 2.74% as of November 25.)
Including dividends, the S&P 500 has now returned a cumulative 195% (25.8% annualized) from its nadir on March 9, 2009. But, of course, that followed a 55.3% loss during the bear market, the worst since the Great Depression. But the average bear market has posted losses of 38% and typically takes back about half the gains from the preceding bull market.
That’s why Stack puts so much emphasis on what he calls “risk management,” rather than market timing. Call it what you will, his record speaks for itself. As for now, Stack says, we remain in a bull market.
Steven T. Goldberg is an investment adviser in the Washington, D.C., area.