The current bull market, which turned five years old this year, has already earned its place in the august company of the Roaring 20’s and the dot-com boom of 1990s. Ever since late July, when a one-day drop in the Dow wiped out a month’s worth of gains, however, the classic bull-bear debate over the capital markets’ near and long-term prospects has dramatically intensified. The significant majority of expert and even retail investors seem to hold bullish sentiment for at least the near-term. Indeed, the four headlines featured on CNBC’s halftime report as I am writing this article read: “Bull sees path toward S&P 3000,” “Analyst: Apple wallet a ‘turning point,’” “Tesla hits new highs on bullish call,” and “These bank stocks could double.”
Despite the general sentiment, the bears are certainly justified in their worry. After all, the last 5-year boom we experienced ended with the worst economic downslide since the Great Depression. The most common concern the bears cite is the unprecedented support that the United States’ central bank has provided to support growth. By buying back bonds and mortgages, the Fed has created a historically low-interest-rate environment that has promoted spending in all levels of the economy. With this quantitative easing program coming to an end in the very near future (likely October), many investors like Jim Bianco, a leader in market analysis at Arbor Research & Trading, believe that, “the bull market of the last four-plus years has a lot to do with Federal Open Market Committee stimulus. If history is any guide, its removal would figure to be a profound negative for equity prices.”
While on the topic of bears’ concerns, it seems appropriate to discuss the effect, or lack thereof, of geopolitical and foreign economic events. The recovery and performance of European markets has been nothing short of wan and the developments in Gaza and Ukraine almost utterly unpredictable. Though conditions like these have historically rippled negatively into the equity markets, they currently seem to have no effect. Stock prices, with few sector or company specific exceptions, continue to tick steadily higher in spite of frequent distressing headlines. It would, however, be dangerously misguided to take this seeming immunity as any sort of guiding precedent. The uncertainty of geopolitical events is virtually always a factor in any sound investor’s assessment of the state of the economy. The current condition speaks only to the robust optimism and popular belief in long-term growth in equity markets.
My view on the matter, for various reasons, is with the majority. The Fed has been more transparent about its intentions with its monetary policy than ever before in its 200-year history. The markets have more or less known that the end to the Fed’s quantitative easing program was imminent since the announcement of the 10 billion dollar monthly taper in the beginning of this year. There is no apparent reason why investors would react as negatively as bears claim (some go as far as to predict a 50 to 60 percent fall in the market), given that they have known the central bank’s intentions for over half a year now.
Additionally, the entry of the bull market into its sixth year is more significant than most realize. As Wallace Witkowski of MarketWatch points out, the few bull markets in history that have crossed their fifth year have flourished spectacularly in their sixth, with an average annual growth of 26 percent. Though I certainly find it hard to get on board with U.S. Trust’s Chris Hyzy’s call of a 20-year-long bull market (the longest recorded run to date has only lasted 10), Wharton professor and renowned economist Jeremy Siegel proffers a more tempered and realistic prediction: “We’re not over with this bull market. I’m sticking with my projection [for the Dow Jones Industrial Average] of 18,000 by year end. Our economy is the best of the three major engines in the world, and that’s why I have faith in U.S. stocks.”
Even if the Fed chooses to raise interest rate in the near future, many of us have seen rates higher than 7 percent in our lives. It is a virtual impossibility that rates will reach anything near those levels any time soon, and investors are well aware of this fact. Regardless of what the future has in store, there is no denying that we are currently living through one of the most prosperous markets in America’s financial history.
