Does this bull market still have legs?

David Joy, Chief Market Strategist, Ameriprise Financial

January 2018

Key Points

  • The bull market in stocks is about to reach its ninth anniversary
  • The current bull market ranks among the longest – and strongest – in history
  • Even in a favorable environment, investors should be prepared for potential volatility 

If the current bull market seems as if it has been running for an awfully long time, that’s because it has. It will reach its ninth anniversary in March. This has caused some to conclude that the end must be near. How does the current bull market compare to others, and what, if any, guidance can we obtain from history?

How this bull market compares

By widely accepted definition, the current bull market is now the second longest on record. It earned that distinction back in September, marking eight and a half years without a decline of 20% or more. The end nearly occurred between May and October 2011, when the Standard & Poor’s 500 (S&P 500) stock index declined an accumulated 21% in the midst of a trading day. But by day’s end, the stock index rallied to close just below the 20% threshold. At that time, it should be noted, many other stock market indices fell by more than 20%. 

It is now the second best bull market in terms of total return, with a gain of more than 300%, including reinvested dividends. It trails only the 1990’s bull market, which generated a 417% return.1

For this bull market to earn the title of longest on record, it will have to survive until about Labor Day when it will have eclipsed the bull run between 1990-2000. 

More gain, little pain

It has been some time since we last endured a market correction of at least 10%, the most recent drop occurring almost two years ago in 2016. On average, the market sees a correction about every one and a half years. By no means is the current interval the longest. The S&P 500 went seven years in the 1990s without so much as a 10% correction.2

The market has not had a correction of at least 10% for nearly 2 years.What has been unusual about the current interval since the most recent correction is the virtual absence of volatility in the S&P 500. The Chicago Board of Options Exchange’s Volatility (VIX) index of implied near-term volatility has fallen to record lows this year. Not only has there been an absence of big swings in the market, there have been fewer small moves as well. In November, the S&P 500 established the record for the longest stretch without a 3% correction, at 393 trading days and counting.3

In mid-November, the S&P 500 ended an almost two-month stretch without even a half percent decline in a day, the longest in five decades.

Can it continue? Yes, it can

The current bull market is one of the longest and calmest on record. And it is making a run at being the longest in history. Is the market overdue for a correction? It isn’t age per se that causes a bull market to run out of gas. It happens when:

  • Credit conditions tighten
  • Economic activity declines
  • Corporate earnings peak

As we begin 2018, we see continued growth in both the U.S. and global economy. Corporate earnings are expected to experience solid growth, and any interest rate hikes by central banks should be modest.

Prepare for potential changes

Many experts are predicting a market correction (a drop of 10% or more) in 2018, and we should not be surprised if one happens. If it does, then the question for long-term investors will be whether it signifies the end of the bull market. Unless fundamental economic conditions suddenly become unfavorable, expect the bull market to resume after any correction.

Now is a good time to discuss your investment strategy with your financial advisor. If you have dollars to invest, it’s important to be mindful of fund allocation. For money already invested, revisit portfolio positioning for consistency with your risk parameters. The time is right to work with your advisor to review your investment strategy considering today’s bull market environment.

 

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