10 Numbers That Explain This Bull Market — And Where It’s Heading
After the markets steadily fell over the second half of 2008, the first trading day of 2009 brought a dose of investor optimism, with the S&P 500-stock index rising 3% to close at 932. Hopes of a sustained rebound were quickly dashed as the index went on to finish below 700 just a couple of months later.
Even the boldest investors, piling their final funds into the market in search of deep value, were about ready to throw in the towel.
And then, the clouds suddenly parted on the morning of March 10, 2009, and stocks began to climb and climb. A little more than four years later, the S&P 500 has racked up a stunning 150% gain. Yet as the market moves ever higher, investors have grown antsy.
The rally hasn’t come on the heels of a robust economic expansion. Instead, the U.S. economy muddles along, as key trading partners move in and out of intensive care. Does that mean stocks are now overvalued in the face of considerable global headwinds? Well, a closer look at the numbers can give a sense of whether this bull has more room to run — or if it is growing tired. Here are 10 ways to look at this market.
1. 25% vs. 1%
In the past year, the S&P 500 has risen roughly 25%, even as aggregated 12-month trailing profits for companies in the S&P 500 rose roughly 1% in the second quarter of 2013, compared with the prior 12-month rolling period. The outlook for profit growth in the next few quarters also calls for aggregated earnings-per-share (EPS) growth in the low single-digits.
2. 14.5 vs. 17
A year ago, the S&P 500 traded for about 14.5 times trailing 12-month profits. That figure now stands at 17 times trailing profits. That’s slightly above the 10-year average, according to Bespoke Investment Research. Looking at the past 85 years’ worth of data, bull markets tend to begin with an average trailing price-to-earnings (P/E) ratio of 11.1 (which was the case at the end of 2008). And bull markets tend to end, on average, when the figure reaches 18.2. By that math, we have less than 10% upside remaining until we hit the upper end of the average. Then again, some argue that P/E ratios simply don’t matter. At the start of 1998, the trailing P/E on the S&P 500 stood at an already elevated 20 — but still moved up to 30 in the next two years.
Yale University professor Robert Shiller prefers to look at earnings in the context of economic cycles, developing what he calls the cyclically adjusted price-to-earnings ratio, or CAPE. The technical explanation: “The numerator of the CAPE is the real (inflation-adjusted) price level of the S&P 500 index, and the denominator as the moving average of the preceding 10 years of S&P 500 real reported earnings, where the U.S. Consumer Price Index (CPI) is used to adjust for inflation,” according to his website.
As of July, this figure stood at 23.8. That’s up from 20.5 at the end of 2011 and 15.3 at the end of 2008. The current reading is the highest since January, 2008, when it stood at 24. For a bit of perspective, the CAPE exceeded 40 back in 1999 and 2000, so we’re hardly in frothy territory.
Our current bull market has been underway for 1,600 days. From 1928 through 1973, the average bull market lasted 1,140 days. From 1974 through 2007, the average bull market lasted roughly 2,650 days. By that measure, this bull market could last three more years.
5. $1.42 trillion
That’s how much money is now invested in exchange-traded funds (ETFs). That compares to $531 billion at the end of 2008. The 170% increase in ETF assets since the end of 2008 is roughly double the rise in the S&P 500 in that time, implying that inflows into ETFs, and not just asset appreciation, are a key hallmark of this bull market. It also means that traditional stock picking is losing favor to sector, industry and thematic styles of investing. Meanwhile, investors still had $13 trillion in mutual funds as of the end of 2012, according to the Investment Company Institute, putting to rest the notion that “ETFs are killing mutual funds.”
After shrinking 2% in 1982, the U.S. economy roared to life, averaging 5.5% GDP growth over the next three years, and then averaged 3.5% annual GDP growth over the next 15 years, according to the Bureau of Economic Analysis (BEA). That coincided with an 18-year bull market (if you exclude a brief correction in 1987).
Coming out of the recession of 2008, the U.S. economy has had a hard time generating growth in excess of 2% (with the exception of a few quarters in 2012). This year, GDP has grown just 1.1% in the first quarter and 1.7% in the second quarter, which helps explain why corporate profit growth has largely stalled out.
The percentage of sales generated by companies in the S&P 500 from foreign sales offices peaked at 48% in 2008 (after rising from 43% in 2005). That figure now stands at 46% after dropping for four straight years. In effect, U.S. economic activity, along with corporate profit growth, has been clearly hampered by troubles in Europe. To the extent that China’s woes deepen, affecting large U.S. export markets such as Australia and Brazil, the export figure may keep dropping. Then again, an eventual rebound in Europe could help reverse the trend and provide a key growth tailwind that extends this bull market.
That’s the average dividend yield on the S&P 500, according to IndexArb.com. Though companies have been boosting dividends at a rapid pace, they can’t keep up with the surging bull market, so the dividend yield has been steadily falling. At the start of the bull market in 1982, the dividend yield on the S&P 500 stood at 6.7%. Today, there are only two companies in the S&P 500 (Windstream (NYSE: WIN) and Frontier Communications (NYSE: FTR)) that have a yield above 6.7%. The S&P 500’s dividend yield hit an all-time low of 1.4% in 1998, as market gains outpaced dividend growth by a wide margin.
9. $1.27 trillion
That’s how much cash was parked on the balance sheets of non-financial firms in the S&P 500 at the end of 2012, according to FactSet Research. The pile of cash grew 6.1% last year, despite the fact that share buybacks and dividends are growing at a 10% pace. The most important implication for this bull market: Any sharp market pullback would be swiftly met with increased buybacks.
That’s the number of companies in the S&P 500 that are expected to boost sales at least 10% in 2014. And only 21 of those are expected to generate at least 20% revenue growth in 2014. Fully 40 companies in the S&P 500 are expected to see revenues fall in 2014.