Dollars & Sense

Does the Bull Market Have Room to Run?

The outlook for economic growth has improved slightly, as consumer sentiment and spending have increased.
Kate Warne, May 2017
Posted

The current U.S. bull market in stocks started more than eight years ago, in March 2009. It’s now the second-longest bull market, surviving many typical corrections (declines of 10 percent or more) and other smaller pullbacks without experiencing a 20 percent drop. Fortunately, bull markets don’t usually die of old age. They’ve frequently ended when bubbles burst or recessions emerged — and neither is happening today.

The twin supports for rising stock prices over time, economic and earnings growth, seem to be getting stronger, which is why this refueled and re-energized bull can keep charging ahead:

1. Economic growth: The outlook for economic growth has improved slightly, as consumer sentiment and spending have increased.

2. Company earnings growth: First-quarter S&P 500 company earnings are expected to increase by more than 9 percent compared to last year.

Look Forward, Not Back

Long-term investors have enjoyed this long-running bull market. Since March 2009, the annual average return of U.S. large-cap stocks has been 17.6 percent. But the price you pay for an investment matters, and a rising stock market doesn’t mean future returns will be that high — especially not every year. The expected long-term returns for U.S. large-cap stocks are 6 to 8 percent annually. And since valuations for U.S. stocks are slightly above their long-term averages, returns may be somewhat below average over the next 10 years.

International stocks have lagged behind their U.S. counterparts during the past few years and, as a result, are more attractively valued. That’s one reason to expect them to provide higher long-term returns of 7.5 to 10 percent per year.

Reduce Risk by Rebalancing

Are you wondering why your portfolio returns haven’t matched the market? The answer might be in your mix: Most investors don’t want to take on as much risk as the stock market, so they invest in bonds as well as stocks. Bond returns were lower than stock returns last year as well as since 2009, a trend that continued in the first quarter of 2017, so diversified portfolio returns were lower — but also less volatile.

In a bull market, it’s easy to forget how volatile stocks can be. But here are the facts: In the past 32 years, U.S. large-cap stocks dropped by an average of 14 percent during the year, even though they rose in most (25) of those years.

Expect a return to normal market volatility in 2017. If you haven’t reviewed your portfolio with your financial advisor recently, now may be a good time to do so.

Prepare

Polls and pundits seem to have lost their predictive abilities, leaving you wondering which way to turn. Prepare for a wide range of possibilities with a long-term strategy. The outlook is good, but there’s likely to be more volatility ahead. Stay prepared by making some adjustments, including rebalancing back to your desired mix of stocks and bonds and adding international equities if appropriate.

Kate Warne, PhD, is an investment strategist at Edward Jones.

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