Just as trees don’t grow to the sky, bull markets don’t last forever. But how can we gauge the longevity of this bull market?
In January, the Dow Jones industrial average made history by reaching the 20,000 level for the first. It took several weeks of flirting with the milestone before it finally closed above that level.
Investors were exuberant. But soon after many asked how much better can it get.
No one – and I repeat, no one – can predict the end of this or any other bull market run. But I’ve put together a few important signals to gauge this market’s longevity.
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Look for an increase in market volatility and more frequent market corrections. Until recently, market corrections have been few and far between. The VIX index, which measures volatility, was below 14 on Monday. Compare that to its long-term average of near 20. High volatility and market corrections are not a big concern right now.
Look for widening credit spreads, since spreads between investment grade and high yield (junk) bonds have remained narrow. When credit spreads begin to widen, as they eventually will, it may be a sign that growth and corporate profits are decreasing. This is a strong signal that we may be reaching the end of the bull market.
Look for increasing interest rates and inflation. The Federal Reserve recently raised its lending rate by 25 basis points, or a quarter of one percent. This increase is minor, but coupled with increased inflation expectations since the election in November, it’s important to watch. If we see a fast uptick in capital spending and consumer spending, this may force the Fed to hasten the pace of increasing rates.
Increasing interest rates begin to make bonds more attractive than stocks in many cases. Today there are a lot of investors who have a low percentage of their investments in bonds. That’s because interest rates have been so low for so long that many investors looking for income have been forced into the stock market for dividend yields. But, if interest rates continue to increase, many will move back into bonds. Not only do bonds provide needed income, but they also may provide an “anchor” to balance out the volatility in an investor’s portfolio.
Indeed, the bull market looks like it has farther to run. It’s not flashing yellow, much less red, at this time. It could run for at least another year, according to some experts. These signals are something that should be monitored.
While many expect the bull market to continue to run, that doesn’t mean we won’t have a correction – we haven’t had one for a while. The longer between corrections, the deeper the correction becomes.
As always, I am a big believer in staying in the market. An investor is better off with a strong, low-expense portfolio. It is one that will go up in line with the overall stock market, less one’s risk tolerance. It will go down with the market but, alas, it will also go up when the market again begins its upward movement. It always does. It always has.
If one day it doesn’t, then we will have more to worry about that the ups and downs of the market.