The Current Bull Market Is Now 10 Years Old - What Does That Tell Us About The Future?
With March now behind us, the ‘great bull market’ that has run since emerging from the debris of the international financial crisis of ‘08/’09 has now officially passed its 10th anniversary. The average annual Wall Street return of 12.5% since March 2009, which has been reflected across most other international equities markets, will now go down as a phenomenon in the history of financial markets. The question now being asked by analysts is what has caused the phenomenal rise of risk-based assets and what insights into how the future differ from the past can be drawn from it?
The negative interpretation is that the 10-year-and-counting bull run has been artificially stimulated by the unique combination of unprecedented levels of money printing and historically low interest rates. This would imply the last ten years have stored up a monumental crash which will hit at some point as fiscal policies are gradually brought back to normal.
However, many analysts argue that this is a doomsday scenario view not supported by many of the facts. The first of those is that despite the more recent extreme of 2017’s huge gains, equity prices are still within their long-term rising trend lines, having started 60% below them in March 2009. The gains since still see U.S. equities 9% below their long-term trend line with many other developed markets, particularly Brexit-hit London, with significantly more wiggle room. This suggests that fears of a ‘bubble’ are misplaced.
The Gordon’s Growth model says changes in equity valuations can be put down to any combination of:
- Company dividends
- Company earnings
- Expected future dividend growth
- The real risk free interest rate on government debt
- The equity risk premium
The biggest contributor to values growth over the last ten years has been increasing dividends. The next has been a decline in the equity risk premium. Risk-free real interest rates and expected future dividend growth are at levels similar to those a decade ago so not bit contributors to the bull run. If monetary policy had been the major contributor to rising valuations, it would have been expected that declining real interest rates on government debt would have been the most significant factor, which it has not been.
A future cyclical rise in interest rates could well see a new bear market come into effect. At some point the bull cycle will have to end. But there is plenty of evidence to reassure that ‘real’ fundamentals have underpinned the last 10 years and any future bear market will prove to be a ‘normal’ one rather than a cataclysmic market crash.
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