Yahoo Finance Three reasons this seven-year bull market still has legs
Are stocks overvalued, or is now the right time to get into the market? It's one of the oldest debates on Wall Street, and something that's very difficult for investors to time correctly.
The debate rages on, as the S&P 500 index (^GSPC) is a stone's throw away from new highs. If the S&P 500 makes it just a little higher– to 2135– this bull market could become among the longest in U.S. history.
Sentiment among money managers is the least optimistic it's been in nearly 20 years, according to a Barron’s poll. Only 38% of money managers have a bullish outlook in the near-term, while 16% are bearish and 46% are neutral.
Perhaps investors are feeling cautious due to high market valuations, but stocks are not out of sync with historical norms. The S&P 500 price-to-earnings ratio is currently 19, in line with the market’s average since 1999.
While both the bull and the bear camps have strong reasons backing their point of view, today we'll examine three bullish signals and save the bearish reasons for next time.
1. Bulls can run with bad news
The rally’s most recent gains have been maintained—even with lackluster earnings. Tech behemoths, including Netflix (NFLX), Alphabet's Google (GOOGL), Microsoft (MSFT) and Apple (AAPL), all reported results that missed expectations. Overall, analysts foresee earnings of S&P 500 companies to fall by 7% in the first quarter, compared with the same period a year ago, according to Thompson Reuters.
Given tepid earnings growth, it is a bullish sign that stock buyers have still been able to outpace sellers. The ability of stocks to easily discount bad news is a hallmark of a sustainable bull market.
2. Total returns have hit all-time highs
The second signal is in the S&P 500 total return index, which includes both capital gains and dividends. This metric assumes dividends are reinvested in the stock, and it gives a more accurate picture of an index’s performance by accounting for all sources of returns. Using this metric, the S&P 500 recently hit new all-time highs.
3. Passing the break-even point
S&P 500 volume at price shows the cumulative volume at each price level. Volume spikes around the inflection points, as excess demand or supply gets matched, with relatively light volume in between.
Volume tells an important story, since these are the levels at which many investors entered or exited the market. It's psychologically significant for those who want to break even after being underwater.
The fact that the markets broke past one of the heaviest volume levels is key. Buyers were able to overcome all the sellers who wanted out at break-even.
From here there's still an upward battle to be fought, but as long as there's no central bank surprises, achieving the title of second longest bull-run in post-war history might not be so far off.
