Charles Schwab’s Liz Ann Sonders thinks the bull market that began in 2009 is in a “mature” phase, but not so mature that it will come to an end anytime soon.
In commentary on Schwab’s site, Sonders says she expects gross domestic product growth, which for much of the recovery has lagged private sector growth, to continue catching up this year. She also thinks we’re into a phase of the bull in which capital spending — not consumer spending — appears to be driving the bull, and capex-driven markets tend to be longer-lasting than consumer-led markets.
Sonders also talks about how remarkable the lack of long-term optimism has been during this bull. And she casts doubt on claims that the bull has been artificially juiced. “Many have argued that multiples have risen ‘artificially;’ pushed up by risk-seeking investors and record-low interest rates (the ‘QE is propping up asset values’ argument),” she says. “Interestingly though, the multiple expansion in this bull market has been about average for bull markets since 1957. So if valuation expansion has been average, why have stock market returns been so high? Earnings! Earnings growth in the current bull market has been 20% above the average level of growth for all bull markets since 1957.”
Sonders does think that shorter term sentiment has gotten high, however, and she thinks the market could go through more “mood swings” in 2015 than investors have experienced recently. One catalyst for those swings could be interest rates. “The onset of Fed tightening cycles has not upended bull markets historically — quite the contrary — but they do often usher in bouts of volatility and pullbacks,” she writes. “Case in point would be the most recent two tightening cycles (during the mid-1990s and mid-2000s); during which periods the stock market performed admirably, but with five corrections (or pullbacks) during each cycle. The corrections averaged -12% in the mid-1990s cycle, while the average pullback was a lesser -7% in the mid-2000s cycle.”
“Looking at every initial rate hike since the early 1960s, and analyzing the stock market’s behavior in the six months before and after that initial hike, we find that the market’s weakest period tends to occur several months in advance of the initial hike,” Sonders says, “but that the trajectory of the market’s performance is largely higher over the full year.”