Can This Bull Market Keep Heading Higher?
The stock market has continued its long bull run, up nearly 14 percent year-to-date. It’s the second longest bull market in history, which was born in March 2009 following the Great Recession. And it’s that longevity that has investors wondering – when will it end?
Despite setbacks, like the oil crash prompted by OPEC’s war on U.S. shale and the subsequent deal to cut production in order to lift prices again, the current bull market has continued on unfettered. But there are cracks showing that could bring about the start of a new bear market. Whether those cracks will widen this year or next is still debatable.
Obstacles in the Markets
Stocks have climbed without stumbling much so far this year. There hasn’t been any sign of a correction and any negative news seems to get absorbed by investors without blinking. But investor confidence may be misplaced.
One of the most often quoted indexes on Wall Street is the VIX Volatility Index, commonly referred to as the “fear gauge.” Anything over 20 is considered volatile, while anything under 15 is considered calm. Contrarian and value investors like to sell during calm markets and buy when volatility is high and other investors are panicking.
Right now, the VIX reads at around 10, with less than a handful of minor spikes above 15 earlier in the year. At first glance it might seem like this means everything is steady and calm in the markets. But really, all it says is that investors believe risks are low. Long-term low volatility can indicate a level of apathy in investors minds who aren’t correctly anticipating or pricing in real market risks. It’s a prelude to a possible correction.
One of the best indicators of an issue is the average multiple relative to earnings investors are paying for stocks. Right now, the average P/E of the S&P 500 is at 25.43. Considering the historical median is 14.67, it seems safe to say that stocks are currently overpriced. However, this statistic alone isn’t enough to condemn the market. From the late 90’s to the early 2000’s, the average P/E stayed above this level and, in 2008, multiples soared above 65 times earnings.
Finally, earnings are what drive stock prices. A recent report revealed that energy prices are expected to fall next year as demand drops – low demand equals lower growth expectations. And if earnings drop, stock values should fall as well. Keep an eye on whether stock values fall with lower earnings. That would make multiples even higher and stocks far more expensive relative to risk.
Despite evidence of an emerging bear market, investors don’t need to press the panic button just yet. History shows that stocks can continue going higher for years even with elevated multiples. While a correction is arguably overdue, it won’t necessarily mean that a long term bear market will take over. It could take several corrections before earnings become too low and multiples too high to support stock values.