The Bull Market Turns 5: Don’t Break Out the Bubbly
7 Financial Stocks That Might Help You Make Bank ·The Fiscal Times
Suzanne McGee
Happy birthday, bull market.
If that sounds less than super-enthusiastic (what, no exclamation mark?), so be it. Yes, the S&P 500 index hit another record on Friday. But two facts make it hard to uncork the champagne and cut myself a slice of cake. The first is that a very large proportion of Americans haven’t benefited from this five-year-long rally. The second? I’m not confident that this bull market is going to last much longer than many of its predecessors. I certainly doubt whether we’re in the early stages of another 18-year bull market like that we witnessed from 1982 until 2000.
I’d be more likely to celebrate this bull market if it had enriched a larger swath of the country. Data from Lipper and other providers who monitor flows into mutual funds show that until last year, ordinary investors stayed away in droves; they were more likely to keep yanking money out of stock mutual funds. So while the S&P 500 index is up 177.6 percent since the March 9, 2009 bottom (and 208.9 percent if you take dividends into consideration), anyone who delayed investing until last January lost out on most of those gains. Stocks have continued to soar since then – the S&P 500 is up 28.4 percent, and 31.7 percent if you include dividends – but that’s a fraction of what investors could have earned had they been willing and/or able to jump back in the market in 2009.
Of course, ordinary investors had plenty of reasons to stay away. In the wake of the financial crisis, many Americans simply may not have felt financially solvent enough to take more risks with their money. Collectively, they had seen trillions wiped off their net worth as a result of the 40 percent stock market nosedive and the meltdown in real estate values.
At the same time, it’s not easy to follow Warren Buffett’s advice and be greedy when others are fearful, especially when the pain of market losses is so fresh. Consumer confidence – a proxy of sorts for the willingness of investors to take risks – has recovered from the lows seen during the crisis and up until 2009, but it still languishes below its average during non-recessionary periods.
Whatever the reason for the average investor’s reluctance to load up on stocks, it’s clear they haven’t benefitted as much from the market’s run. Yes, the net worth of U.S. households hit a new record of $80.6 trillion in the fourth quarter of 2013, according to the Federal Reserve — about $12 trillion above where it stood in the spring of 2007, before the financial crisis. Yet the income gap has only widened in recent years: By the time the economic recovery (as distinct from the stock market recovery, which preceded it) finally got going, the top 1 percent of earners collected 93 percent of income gains.
Let’s put to one side the vexing question of whether that’s fair or moral or sustainable. This data suggests that the vast majority of American households likely were less able to take advantage of the stock market’s recovery, even if they had been able to shake off the lingering psychological effects of the events of 2007 to 2009. Corporate profits may have rebounded, justifying the increase in price/earnings multiples and market valuations that we have witnessed – most dramatically during the course of 2013 – but personal earnings and profits didn’t.
By the time individual investors shook off their aversion to stocks and climbed back on the bandwagon, it was already 2013. The lion’s share of the gains had already been captured. Of course, to the extent that those investors already had a toehold in the market in the form of 401(k) investments in mutual funds that owned stocks, they benefited to some extent, but odds are that their risk aversion was mirrored in their choice of 401(k) allocation as well.
The question now is whether the bull market will keep going so that those who arrived late to the party have a chance to capture some more gains going forward. It’s certainly possible, but market fundamentals are less rosy than they have been. The S&P 500 looks relatively pricey, and analysts are calling for relatively unimpressive first-quarter earnings growth. And economic growth is still clouded in uncertainty.
The Federal Reserve is another source of uncertainty. How committed is the Fed to easing up on its bond market purchases and allowing interest rates to drift higher once more? It’s hard to argue that the incredible inflation in the size of the Fed’s balance sheet that accompanied the stock market rally is merely a coincidence; what remains unclear is the degree of willingness on the part of investors to focus on equity market fundamentals when the Fed removes its heavy hand from one side of the scales.
That doesn’t mean that we’re about to careen off the edge of a cliff – clearly, the bull market requires more than just a slow-motion taper on the part of Fed policymakers and pockets of bad news from emerging markets before it bids us sayonara.
It’s worth remembering, however, that if you do feel like celebrating the bull market’s birthday, the safest way to do it may be by ordering up a big dessert after dinner rather than by allocating a lot more of your assets to U.S. stocks. Analysts widely expect that, even if the rally does continue, the path forward may be much bumpier than it has been. Certainly, it will be tough for the broad market to replicate its outstanding gains from last year.
If you haven’t already rebalanced your portfolio in the wake of the 2013 gains, this is probably a great time to do so – and to scour the market for asset classes that are just as much in the doldrums today as U.S. stocks overall were back in the gloomy days of March 2009.
