The current bull market in US stocks is widely agreed to have begun on March 9 2009, meaning it has just turned seven years old. Perhaps this is a good time to take stock of the situation investors find themselves in.
The seven-year bull run in the S&P 500 index has been widely touted as the “most hated bull market ever”, as investor confidence data has not really managed to stay positive for an extended period before being undermined by one of many crises, particularly in Europe.
That said, the return generated by the S&P 500 at its seven-year anniversary was 238 per cent, which means more than $14trn (£9.9trn) of returns, so investors have been richly rewarded for all the angst they have felt.
This current bull market is the third longest in US history, and it has a chance to eclipse the second longest (1949-56) if it manages to behave itself for a while yet.
The last seven years have seen some amazing occurrences in financial markets, not least of which is the prevailing interest rate environment that has allowed investors to make strong gains. There have been 619 rate cuts worldwide in the past seven years, and those that tried raising rates have either stopped after one (US) or reversed them (Sweden).
Huge quantitative easing (QE) programmes have sought to offer support for economic growth when low interest rates were deemed insufficient. This has resulted in $10.4trn being used by central banks to buy bonds.
One of the outcomes of the low rates and QE has been the repricing of bonds so that they have a negative yield; in effect, investors end up paying to lend to borrowers.
It would not seem too contentious to describe the performance of financial markets over the past seven years as being, well, odd. An environment that has allowed risky assets such as equities to prosper has also been good for returns on bonds.
In other words, good profits have been generated by companies without the threat of a strong economic recovery that would see central banks hike interest rates.
Company profits have been helped by having a strong discipline with respect to costs – wage rises have stayed low, the cost of debt is minimal and reinvestment has been low. These dynamics could soon begin to change, particularly wages, which have already begun rising in excess of 2 per cent already.
Companies now need to see their top-line sales drive future profitability in order to overcome the increased costs of production. If this fails to materialise, then perhaps the bull market will struggle to become the longest – 1990-2000 – on record.
The seven-year recovery in financial assets since the global financial crisis has been beneficial for investors, but there is every chance this advance will begin to falter.
Imagine a scenario where global economic growth begins to pick up, then it would not be impossible to believe that bonds with a negative yield are the wrong price and could therefore prove to be poor value.
The alternative scenario of poor growth may be reasonable for bonds, but would surely hinder companies’ profit growth, putting equity valuations under threat.
It appears as if the 1990 bull market will keep its record.
Marcus Brookes is head of multi-manager at Schroders
