Is This Bull Market Getting Old?

The Market Outlook section of our latest Investment Digest issue featured the chart below, from InvesTech Research. In addition, InvesTech Editor James Stack wrote: “The greatest profits in a bull market are made by long-term investors. Yet new highs in an aging bull market always tend to make conservative investors nervous. “And recent months have been no exception. By historical standards, the current economic recovery is already longer than the average economic expansion of the past century (see graph above). However, economic recoveries—and bull markets—seldom, if ever, die of old age alone.

“When the big bull market of the 1980s started in August 1982 in the midst of record deficits and stubbornly high inflation, no one imagined stock prices would triple over the next five years or that the 1980s would turn into the second-longest economic expansion in U.S. history. Likewise, when the 1990 Recession ended in March 1991 at the height of the Savings & Loan Crisis (in which over 1,000 lending institutions would ultimately fail), who could have guessed that the young bull market would last a record 10 years?

“If there’s one truth about bull markets, it’s that they defy prediction. No one knows how long the current one will last or where it will end. Consequently, one should never second-guess the size or duration of a bull market.” – James Stack, InvesTech Research, 5/3/13 I agree with Stack and think his message is an important one. But, I’ve already written about why bull markets don’t die of old age here, first last February, and again in March. So today I think I’ll do something a little different. Inspired by the InvesTech chart above, which makes very clear the range of possibilities still open to the economic recovery, I think today I’ll let the pictures do the talking. These charts and graphs don’t all have one unified message. But they all have something to say, and they succeed in saying it very clearly. So here, with limited explanation, are some of our Digest contributors’ best visual depictions of what’s happening in the market today, this year and this decade. Call it a sort of “State of the Market,” in pictures. From The Prudent Speculator:

“Though historical evidence and our own experience confirm that a value-oriented, dividend-focused approach provides strong opportunity for market-beating returns over the long term, there is plenty of work to be done in putting theory into practice. Indeed, in any given year, value may lag growth or the combination of the two (blend) might be the top performer. Further, as was the case in 2011, dividend-paying stocks can show the strongest returns, while in periods of outsized overall market gains, non-dividend payers often win the performance derby.” – John Buckingham, The Prudent Speculator, April 2, 2013. From Personal Finance: “Amid today’s backdrop of lingering financial crises, political dysfunction and sluggish growth in the world’s developed economies, anxious investors understandably are increasingly interested in the most bond-like equities they can find. Many stocks of good-quality companies carry yields of 2%, 3% or more. “The rewards of investing in lower-risk stocks that pay good income with capital-appreciation potential have been considerable. Our chart, ‘Less Risk, More Gain,’ compares the S&P 500 with the PowerShares S&P 500 Low Volatility exchange-traded fund (NYSE: SPLV), which holds the 100 least-volatile stocks in the S&P 500. These equities usually also carry above-average dividend yields.

“The dividend-stock trend didn’t take hold early in the bull market. But over the last two years, even this conservative ETF has outpaced the more volatile, theoretically growth-oriented benchmark index, and that outperformance has even accelerated in the last 12 months.” – Benjamin Shepherd and Roger Conrad, Personal Finance, May 8, 2013 From the May 15 Dow Theory Forecasts, Edited by Richard Moroney:

And, finally, from Bob Carlson’s Retirement Watch:

“[One risk to the market is] the potential for declining corporate earnings and profit margins. Margins are well above historic averages and tend to return to the average after soaring to high levels. Companies and analysts are reducing their forecasts for earnings in 2013. “Lower earnings or margins don’t have to damage stock prices. Earnings rose faster than stock valuations since 2009, so there is room for stock prices to grow through multiple expansion if rates remain low and economic growth continues. Historically, stock prices do well when earnings are declining or growing modestly.” Wishing you success in your investing and beyond, Chloe Lutts Editor of Investment of the Week P.S. I just finished choosing 30 great new income securities—stocks, trusts, ETFs, REITs and mutual funds—for the latest issue of Dick Davis Dividend Digest, and I’d like to send it to you free. To get this month’s best high-yield stocks, click here for details.

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