March 9 marked the fifth anniversary of the current bull market for U.S. stocks. A bull market is defined as a rise in stocks of more than 20 percent from a low point until the next decline of 20 percent, which is known as a bear market. It is interesting to note that the trend changes aren't officially declared until a full 20 percent change in direction has occurred.
Major indexes like the S&P 500 have risen more than 170 percent from the bottom which occurred in the nadir of the financial crisis of 2008-09. This is not a record for bull markets, but is certainly a healthy advance.
Five years is getting a bit long in the tooth for the average bull market, causing many to say that this rising trend cannot go on much longer. I don't think it's as simple as measuring the time markets may rise by the calendar alone. Bull markets don't die of old age; rather they end because some economic reason causes investors to move money out of stocks and into other investments, like bonds or cash.
Usually, the lure to move from equities to bonds is because the yield available on high quality bonds is compelling compared to the valuation of equities. In other words, in a scenario like we experienced in 2000 where we can earn 6 percent on a guaranteed U.S. treasury bond and the dividend yield on equities is under 2 percent with price to earnings ratios very high, then the move from stocks to bonds makes sense, especially when viewed in hindsight.
At the present time we still have very low bond yields which are not that far above the dividend yield on stocks. The 10 Year Treasury bond yields just 2.7 percent today and the dividend yield on the S&P 500 Index is about 2 percent. Stocks aren't currently cheap at a price to earnings ratio of 16, but neither are they expensive when compared to past market peaks.
Still, its time to consider strategy for when this bull market does come to an end. Of the 11 bull markets since World War II, only three have survived through their sixth year. The longest ran from the end of the 1987 stock market crash to the year 2000 when the technology stock and dot.com bubble burst-- a 12 year period of time.
Ironically, too much good news is usually the terminating factor for bull markets. In 1987 and 2000 bear markets were caused by the economy getting to be too strong. In both cases the Federal Reserve was actively raising interest rates to slow economic growth with the intent of keeping inflation at bay. The same can be said for the bear market which started in 2007 and, of course, famously coincided with the full blown financial crisis of 2008-09. The federal funds rate was raised from about 1 percent in 2005 to 5 percent in 2007 as the Federal Reserve Board of Governors attempted to squash excessive real estate speculation. As we now know they succeeded.
With the Federal Reserve still very much trying to stimulate the economy, there appears to be a chance that the current run may not quite be over. However, at age 5 it is not time to be complacent.
Tom Breiter, president of Breiter Capital Management Inc., a registered investment adviser can be reached at (941) 778-1900 or by e-mail at: firstname.lastname@example.org