In The Short View in yesterday’s FT James Mackintosh writes about where we are in the current cycle (see Share price moves echo March 1987). One particular statistic stood out to me. Mackintosh writes, “For those bought up on the story of the Great Crash of ’87, such a comparison suggests it is time to sell before disaster strikes. But from March that year equities soared another 16 percent before peaking.”
Just four days ago we marked the 4th anniversary of the market low set on March 9th, 2009 when the S&P 500 closed at 676.53 – marking a nearly 13-year low. The S&P 500 is today just a few points for breaching the high set on October 9, 2007 when it closed at 1565.15.
Bull markets have historically lasted 57 months on average over which time the market is up 164%. The current market is up about 128% over the 48 months. The S&P 500 would need to close at 1,786 – up about 15% from current levels. If this is a typical bull market – we probably have a year left.
I think there are a few potential reasons the current bull market might run a bit longer than the average bull market. Namely,
- the market overshot on the downside and as a result might overshoot to the upside as part of the correction. Under this scenario this bull market runs longer and is up something more than 164 percent from the March ’09 bottom.
- the economic recovery accompanying this bull market has been more muted. Should it actually begin to behave like a true economic recovery it might provide additional support to the market.
- in the current zero interest-rate environment, there is tremendous pressure for assets to appreciate. When the cost of money is zero, everything can up in price. The calculated equity risk premium is near infinity with interest rates at almost zero. The pressures on investors to “Join In” mount as the market rises.
I think this later point has as much to say about where the market will peak as anything.
Are there counterpoints to those above? Definitely. For example, the market has manufactured earnings by cutting costs significantly over the last four years. Margins are at near all-time highs. I’ll write more about this particular point tomorrow and the implications for valuations in 2013.