Reasons Why Stock Market Bull Run Has Farther To Go

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The stock market achieved a monumental milestone in reaching a new high in the first quarter. While many are skeptical about how much higher it could go, stocks are trading at cheaper valuations than at prior peaks. Investment strategists see many reasons for the market to power higher for as long as eight more years.

SPDR S&P 500 ( SPY ), the largest ETF by assets, rallied 10.5% the first three months of the year to 156.67, a new all-time closing high and just a hair below its historic October 2007 intraday high at 157.52. The stock market has rallied an eye-popping 132% from its March 2009 low after crashing 57% in the 2007-09 bear market.

On an inflation-adjusted basis, the S&P 500 is still 10% below its 2007 peak, but the difference has been made up by the dividends, says Jeremy Siegel, an investment strategist at WisdomTree Investments and WisdomTree Asset Management. S&P 500 companies earned $88.45 a share in the past 12 months vs. $84.92 at the peak of 2007, he wrote in a client note.

Earnings would be far higher had many companies not taken large hits against their pension funds in Q4 when interest rates plunged to all-time lows, Siegel says.

Today's valuations are a far cry from the S&P's 2000 high, when it earned $50.95 a share. "Over the past 13 years there has been a 30% nominal return (including dividends), but a 36% cumulative inflation." So the S&P trades well below its March 2000 peak in real terms even when including dividends.

In addition, interest rates were far higher at prior market peaks, so competition from fixed-income assets was far greater. The 10-year Treasury bonds yielded more than 6% in 2000 and 5% in 2007. They currently yield 1.87%.

No Ceiling In Sight

"Although we have returned to historic highs, those don't represent ceilings," Tony Coffey, a portfolio manager for three mutual funds at Franklin Templeton Investments, wrote in an email. "Historically, when the market has reached previous cycle highs, it has tended to go even higher for quite a while before correcting."

Coffey, who overseas $27.5 billion in assets, anticipates a correction in the second half of the year. But he expects the market to outperform bonds thanks to the Federal Reserve's easy policy, the housing market rebound, improved consumer confidence and reasonable valuations.

What's more, an appreciating U.S. dollar has helped control inflation and the earnings yield on the S&P 500 is historically high compared with the 10-year Treasury bond yields. Coffey favors U.S. stocks over foreign, especially Europe, because of the Continent's slow economic growth and poor management of its credit crisis.

"The historical record shows that equity markets are more likely to pause around these levels, pull back, or trade in a long sideways range before continuing higher," Waverly Advisors wrote in a client note Monday. Chart patterns and price action suggest a five- to eight-year bull market from current levels could arise, the firm believes.

Investors should look at any pullbacks or corrections as long-term buying opportunities because investment risks are much lower than in the fall of 2011 during the Greek credit crisis, says Randy Frederick, managing director of active trading and derivatives at Charles Schwab. The U.S. economy is much stronger than it was back then and the Cyprus banking crisis has been contained, Frederick added.

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, rose 3.73% in the first quarter as Japan's outperformance offset European losses.IShares MSCI Emerging Markets ( EEM ) lagged developed markets and the U.S. with a 3.56% loss.

Both EFA and EEM have yet to regain their 2011 highs and trade deep below their 2007 peaks, presenting a possible "catch up" trade in which traders sell their winners to buy the laggards to take advantage of lower valuations.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EEM , EFA , SPY

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