Five charts that explain this record bull market

Experts are warning that high valuations, reflected in low dividend yields, and unencouraging prospects for global growth mean caution is needed. Schroders points out that three-month US Treasury bonds are currently yielding just over 2 per cent, more than the US stock market, suggesting over-exposure to volatile assets is unwise.

The US stock market is on its longest bull-run in history. It began on 9 March 2009 and, so far, has lasted nine years, five months and 13 days. As of yesterday, it beat the great equities performance of the 1990s.

A bull market is broadly defined as one that rises over time without falling more than 20 per cent from its peak during the period.

Since March 2009, the S&P 500, the primary US stock market index, has risen by 323%, a gain few could have envisaged after the index plunged 57% from its peak in October 2007 during the global financial crisis.

On a total return basis, which includes dividends paid by companies, the index has returned 415 per cent.

Gains have been made in spite of a difficult economic and political backdrop over the past decade. More recently, the prospect of trade wars, a surging US dollar, rising interest rates and the withdrawal of stimulus by central banks has failed so far to derail the bull.

From its closing low of 676.53 on 9 March 2009 the S&P 500 has risen to 2,862.96 points. It works out to an average rise of 16 per cent a year.

But while the current bull market is the longest in history, bigger gains were made during the 1990s. From a closing low of 295.46 on 11 October 1990, the S&P 500 rose 417 per cent to peak at 1,527.46 on 24 March 2000, or 546 per cent on a total return basis.

S&P 500 bull markets: 1990s vs the 2010s

The current bull market for the S&P 500 peaked on 26 Jan 2018 at 2,872.87, although it registered a higher intra-day level yesterday at 2,873.23. The furthest the index has fallen since then is 10% to 2,581 on 8 February 2018. The bull market has lasted for 3,453 days.

Marcus Brookes, Schroders head of multi-manager Marcus Brookes says:“To justify current high valuations we would need to see strong global economic growth to boost company earnings.

“In addition, valuations may be worse than they look because US tax cuts have flattered the pace of earnings growth. If you look at the trailing PE, it is higher than it was at the top of the market in 2007 (17.4x).

“There’s another crucial distinction from other bull markets. During the tech boom, a small number of companies were on very high valuations. In today’s market, there are a far greater number of companies on high valuations.

“That’s why strong economic growth is needed. The problem is that the backdrop is actually one where the economic cycle growth rate has probably peaked, we have trade disputes and we have monetary tightening in the form of central bank stimulus being removed or interest rates being raised. It’s far from the perfect mix of conditions.

“In a low-return world, we don’t think this is the time to be overexposed to volatile assets that look expensive and which need good times ahead to justify their valuations. At this point, other, less volatile assets, such as cash, have their attractions. It’s noteworthy that US government bonds, in the form of three-month Treasuries, currently yield a little over 2 per cent – more than the US stock market.”

Since 1970, the S&P 500 has seen seven bull markets, five of which resulted in a market rise of more than 100 per cent, says Schroders.

1. The 1970s economic recovery

Despite perceptions of economic turmoil in the 1970s, assets rose rapidly in certain periods. A rally started in 1974. It came after a recession that followed the post-Second World War expansion and lasted just over six years during which time the S&P 500 rose by 122 per cent. The decade also saw high inflation, which would have eroded asset price gains

2. The Reagan-era presidency bull market

This was the joint shortest of the five bull-runs where the S&P500 rose in excess of 100 per cent. However, on an annual basis it was the best performing bull market, with the S&P rising 26 per cent annually. It was powered by huge tax cuts, massive job creation and record wealth creation and lasted between August 1982 and August 1987

3. The great expansion of the 1990s

This bull market coincided with good economic times; robust job growth in the US and a tax relief act made certain stocks attractive. Technology companies boomed as the internet took off and culminated in a powerful bull market that went to extremes before collapsing in early 2000. This bull-run began on 11 October 1990 and lasted just under nine-and-a-half years. The total index rise was 417 per cent.

4. Pre-global financial crisis bull market

Beginning in the aftermath of the dotcom bubble and September 11 attacks, this bull market lasted between October 2002 and October 2007. It was fuelled by low interest rates and easy access to credit which was largely invested in the housing market. It ended when property prices began to collapse due to the subprime mortgage crisis.

5. Post-global financial crisis bull market

The current bull market is the longest on record. It began in March 2009 and has been fuelled by record-low interest rates and the easy monetary policies adopted by central banks which has made it cheap to borrow money. It has been extended by President Trump’s tax cuts, which reduced taxes paid by US corporations.

S&P 500 major bull markets since 1970 

While US shares have enjoyed the biggest gains over the last nine-and-a-half years, the rally in stocks has been global. German stocks have returned nearly 250 per cent over the same period and UK stocks have made just over 200 per cent, according to MSCI indices. Chinese and Japanese stock markets have registered returns of nearly 200 per cent.

Quantitative easing has driven down the cost of financing. It has kept lenders lending and corporations spending. It has inflated the prices of many assets, from stock markets to houses to classic cars.

Global stock market returns 2009 to 2018

What $1,000 would be worth now if you invested in March 2009

Best performing sectors globally: March 2009 – August 2018

In 2009, investors in the US stock market received a decent income yield of 3.3 per cent. Today, they could expect just 1.9 per cent.

Conversely, the P/E ratio has gone from around 12 up to 23, while the P/B ratio has more than doubled. A swing to higher valuations is expected as the market rises. For investors, the crucial task is working out whether those valuations remain attractive today.

Stock market valuations: March 2009 vs August 2018 

Will Hobbs of Barclays Smart Investor says:“Recessions and bear markets tend to go together – while the economy continues to grow, the Bull Run should continue. However, humility is appropriate here. Our ability to accurately call recessions is very limited.

“Liquidity and sentiment are overestimated factors in this Bull Run. The strength and length of this bull market has its origins in the severity of the downturn a decade ago. The related decline in US corporate profits in 2008/09 was the largest proportionate fall on record, larger even than that seen in the Great Depression. However, the cause of this dramatic fall in earnings was also the seed of their dramatic bounce. Write downs of financial assets at banks, insurers and some large manufacturers with substantial financing departments trounced corporate earnings as they travelled from balance sheet through the profit and loss statement. However, such write downs were only ever going to have a transitory effect, once the write downs stopped, the weight was lifted and earnings flew.

“Essentially the record-breaking nature of the recession experienced by the US and world economy between 2008 and 2009 perhaps always suggested that the recovery from those depths would be similarly record breaking in nature. The fact that private sector scar tissue and a suitably chastened banking sector are only just starting to more visibly recover is among the factors suggesting that there is scope for this recovery to go further yet – the wild cyclical hubris that tends to precede the worst recessions is so far substantially absent.

“Having a portfolio that is designed specifically to weather recessions and bear markets is one of the most common, but understandable, investing mistakes of this economic cycle. The truth of the world economy and its related capital markets is that growth is the norm, not the exception.

“There is certainly threat of an all-out trade war out there. This is an area where the constitutional restraints on the President can be of little reassurance after all. At the moment, inflationary forces still seem to be in abeyance, which should allow interest rates and wider monetary policy to be normalised at an unthreatening pace. However, it is worth bearing in mind that the relationship between growth and inflation is a loose one, prone to defying academics and text books alike. A necessarily more hostile central bank would certainly be something to worry about.”