BREAKING: Is This the End of the Bull Market?

David Goodboy's picture

Friday, December 23, 2016 - 9:30am

by David Goodboy

Stock investors have truly been blessed in 2016. The major averages have been rocketing higher despite dire predictions of a crash due to the uncertainty revolving around the current president-elect. Rather than dropping on this uncertainty, stocks have embraced the pro-business and nationalistic stance of the pending administration with an incredible vigor.

But it poses the question: Is this the end of the bull market?

To answer this vexing question, I decided to take a close look at the most popular stock market barometer for answers. What I discovered was surprising. While no one knows for certain what the future holds, my research reveals that the bull market could easily last another two or more years.

What Has Happened So Far?
At the time of this writing, the Dow Jones Industrial Average (DJIA) has pushed another 100 points higher into the 19,900 area. Early in 2016, the DJIA hit a low in the 15,450 zone on pre-election jitters. Since that time, this index, affectionately known as the stock market barometer, has added over 14% in a steady climb higher. In the short time since the election, the index has risen by over 8%.

These figures mean that the DJIA has outperformed both the S&P 500 and the Nasdaq, which have advanced 11%- and 9%-plus respectively. Before I describe the reasons why I think the bull market will have a long life, let's take a closer look at the construction of the DJIA.

Launched in the late 1800s, the DJIA (colloquially called just "the Dow") is made up of 30 stocks. The individual stocks are weighted, and each one point change in a DJIA stock corresponds to a move of 6.85 points in the index.

The index has been on a steady upward trend since inception. It hit 1000 in 1972, running above 10,000 27 years later in 1999 and surpassing 15,000 during 2013. Today, the index has a high probability of surpassing 20,000 in 2016. As you can see, the index is moving exponentially faster as time rolls on.

Components are weighted based on market capitalization with Goldman Sachs (NYSE: GS) carrying the most influence. Interestingly, Goldman is the 40th most valuable company in the United States, yet it holds the most sway over the critical DJIA index. In fact, 40% of the gain this year can be attributed to just three companies: Goldman Sachs, United Health (NYSE: UNH), and Caterpillar (NYSE: CAT). Out of this 40%, Goldman led the pack by a wide margin with a 33% contribution to the total gains.

The primary complaints about the DJIA are the facts that technology is not well represented. Apple was added in March 2015 to make up for this deficit, but shares have only dragged on the index since the addition. In short, the DJIA is no longer as representative of the U.S. economy as the S&P 500 Index.

5 Reasons Why The Bull Market Is Far From Over

Reason 1: Fair & Square Valuations
Believe it or not, the 30 DJIA stocks trade at an average of 18 times estimated 2016 earnings and 16 times estimated 2017 profits. These are very fair valuations in the current low-interest-rate climate.

Reason 2: Trump's Trumpet
The Trump presidency should be ultra-bullish for financial, manufacturing, and infrastructure companies. Trump truly plays the trumpet for business growth. Potential regulatory slashes will support the finance industry in particular. Also, the repatriation of corporate cash held overseas will likely trigger massive share buyback programs that will force the stock market higher. Add in the promised increase in infrastructure spending and focus on national manufacturing and equities truly have no place to go but higher.

Reason 3: Interest Rates' Silent Scream
I know this flies in the face of conventional wisdom, but history proves that slowly climbing rates are beneficial to the stock market. The Federal Reserve has increased interest rates fourteen times since 1957. Each of these 14 periods has experienced an average of just under 10% annual stock market returns. What hurts stock prices is an unexpected jump higher in interest rates. As long as the market is given enough warning and the rate rise is gentle, climbing rates will help the bull market.

Reason 4: The Hope Trifecta
Borrowing this phrase from Allianz chief economic adviser Mohamed El-Erian, growth, liquidity, and inflation will all work to keep the bull market moving higher. The liquidity will come from Trump's repatriation of corporate cash. Increasing inflation triggered by the growing strength in the greenback will enable corporations to charge more for their products, fueling their growth.

Reason 5: Momentum
Price momentum is the force behind the successful trading method known as trend following. The markets are exhibiting a strong upward trend. As the markets churn higher, they keep attracting more and more money from the sidelines becoming a self-sustaining cycle of higher highs.

Risks To Consider: All of the above speculation is predicated upon no external shocks to the economy and the Trump administration carrying through with its promises to a certain degree, neither of which are guaranteed.

Action To Take: Use this bull market as an opportunity to increase your positions and transition some of your holdings out of the bond market. Remember to always perform your own research on potential investments; an overall bullish market sentiment does not mean that all stocks will benefit.

Editor's Note: It's everywhere, in everything from cell phones and handheld games to solar panels and pharmaceutical drugs. And prices are set to soar! Check out our 10 most shockingly profitable stocks of 2017

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.