Source: Getty Images/David Hogan.
Five and a half years in, the bull market is booming! Yet many believe stocks can’t zoom and a meltdown must loom. Headlines seem to be on permanent peak-watch—pointing to the end of quantitative easing (QE), "sky-high” valuations, charty mumbo-jumbo, complacency, old age (of the bull and investors), all-time highs and many more as the bull’s death knell. But, in my view, these are false fears—misinterpreted and too widely discussed to pack a nasty wallop. Especially when so much is propelling stocks upward. There are like 823,409,298,549,432,498[i] reasons to be bullish, but I’ll highlight five of them:
1. Corporate earnings and revenues are on a tear—and all-time-high-and-rising business investment should drive further growth. This is what you own when you own stock. This also helps put one of today’s fears in perspective: Some bemoan all-time-high corporate debt, fearing firms are storing up trouble. Yet with earnings and revenues strong and balance sheets flush with cash, higher debt is manageable! It also makes good financial sense that companies take advantage of favorable interest rates by storing up earnings as collateral for a cheap loan to fund investment and the odd share buyback—they can boost their return on investment without depleting their rainy-day cash cushion.
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2. The Conference Boards’ Leading Economic Index (LEI), a pretty reliable gauge of future economic direction, is high and rising for most major economies—like the US, UK, eurozone and China—suggesting more global growth ahead. If major countries’ (or regions’) LEIs are in an uptrend, a recession is unlikely to follow closely—no US recession in LEI’s 55-year published history has started while the index was rising. And the best part? Most think global growth is shaky, and almost no one looks at the international LEIs. Few people notice this handy preview of global growth! So few see just how strong the world’s potential is.
3. Bank lending is also gaining steam—a powerful force for economic growth, and you can thank the “taper” of quantitative easing (QE) for that. Long-term rates jumped after former Fed head Ben Bernanke first alluded to tapering QE in May 2013, steepening the yield curve and making bank lending more profitable—a big incentive for banks to get money moving.[ii] Long-term rates have fallen some this year (just normal volatility), but they’re still higher than before taper talk began, and the latest data show banks still have their foot on the gas. Better still, few people realize the yield curve is still relatively steeper—most are stewing over falling long rates without putting them in context.
4. The political landscape is favorable. Why? In the developed world’s most competitive economies, it’s gridlocked! People hate gridlock—they see bickering, do-nothing Congressmen—but markets love it. Gridlock reduces the likelihood of radical legislation impacting property rights or the distribution of resources and capital, lowering legislative risks to stocks. As a bonus, 2014 is a midterm election year—historically a time when gridlock rises, and this year looks no different. This is why US stock returns are usually positive in midterm-year Q4s and the subsequent two quarters. Each is positive 86.4% of the time[iii]—well above the 67.4% frequency of positive quarterly returns.[iv] It’s all because markets are slow to realize midterms mean gridlock—investors get caught up in extreme campaign rhetoric as elections near. But as elections come to an end and the noise settles, investors realize all the campaign promises are empty and Congress probably can’t pass any radical legislation.
5. And sentiment remains far from euphoria. Sentiment isn’t nearly as drab as it used to be. More investors are seeing some positive news. Fewer people are reacting to good news with “yah buts.” Yet skepticism still remains—people don’t fully appreciate all of the positives out there (and let’s not forget all the false fears). But that leaves plenty of room for feelings to brighten—and for ever-more confident investors to bid prices higher.
Now, none of this means risks are absent. But with most risks widely discussed—and none of the less-seen risks big or likely enough to lop a few trillion off global trade or GDP—this just isn’t the time to seek a peak, in my view. This bull market should keep charging on over the foreseeable future.
Stock Market Outlook
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[i] This is an exaggeration for dramatic effect. But there really are plenty of them!
[ii] Federal Reserve Bank of St. Louis, as of 7/21/2014. 10-Year Treasury Constant Maturity Rate, 5/22/2013-12/31/2013.
[iii] A bizarre coincidence.
[iv] Global Financial Data, as of 07/23/2014. S&P 500 Total Returns for calendar quarters, 01/31/1926-06/30/2013.