Tags: bull | Fed | market | return

The Bull Market at 6

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Thursday, 12 Mar 2015 08:07 AM Current | Bio | Archive

Monday marked the six-year anniversary of the March 9, 2009, low for the market and the beginning of this bull market. It's been a great ride. During the period, the S&P 500 index has more than tripled in value.

But investors are starting to get antsy. They wonder how much is still left in the tank.

There is understandable reason for concern. Now 72 months old, this bull market (without a 20 percent or more correction) is already one of the longest in the last 80 years. And stocks are no longer cheap. The S&P 500 price-earnings ratio is between 19 and 19.5. The average in the last 15 years is about 16 times earnings.

While just about every year this bull market has overcome cynicism and continued to rise, things have changed. The most notable difference is the Federal Reserve. Last year the central bank ended its $85 billion per month bond-buying program, and this year it is expected to begin raising interest rates.

Fed stimulus, the factor considered most responsible for driving stocks higher in this bull market, is not only ending but reversing. In order for this bull market to continue, genuine economic growth will have to replace Fed stimulus as the major force propelling stocks higher. Is the economy up to the task?

It did pretty good last year. As the Fed withdrew its quantitative easing, many speculated that the market would suffer. After all, this was taking the punch bowl away. But the economy (after the first quarter) turned in a solid performance, averaging growth of better than 4 percent for the last three quarters of the year. Earnings on the S&P 500 grew at double digits for the year. And the market returned more than 13 percent for 2014.

But the economy will have to come through again — this time with interest rates most likely rising. It's not so much that the Fed will hike rates much higher any time soon. If the discount rate is hiked say 1 percent during the rest of the year, it will still be at just 1 percent to 1.25 percent. Stocks will still be the only game in town to earn a decent return. It's mostly just the fact that the Fed is raising rates itself. The action will underscore the fact that the Fed is no longer supporting the market.

Stocks will have to rise based on economic growth and earnings, just like they used to.
The consumer will have to take a leading role. After all, consumption accounts for approximately 70 percent of GDP. Armed with lower gas prices, the highest confidence index numbers since the recession and expected rising wages, consumers will have to step it up for the rest of the year.

Corporate earnings will not only get a boost from the consumer but also from the lower commodity prices in the second half of the year. The negative repercussions of falling oil and commodity prices hurt stocks in those industries immediately, but the positive aspects of lower input costs tend to take longer to seep through.

There is a strong chance that the economy will be strong enough to continue the bull market through the rest of the year, especially with the tailwind that money will still have no place else to earn a decent return. But this leg of the bull market will have to do without the temperature control previously provided by the Fed. The market will be like a building with the heating and air conditioning shut off. It will at times get too hot and too cold.

A higher level of volatility can be expected. The market will likely return less than it has in recent years, but with more angst. But for the most part, the bull market is like an old athlete with another good season or two left in him.

About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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TomHutchinson
Monday marked the six-year anniversary of the March 9, 2009, low for the market and the beginning of this bull market. It's been a great ride. During the period, the S&P 500 index has more than tripled in value.
bull, Fed, market, return
686
2015-07-12
Thursday, 12 Mar 2015 08:07 AM
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