What comes next? Bull, Bear, Correction?

Contributed by Antoine Williams

The bull market in U.S. stocks has been charging ahead for more than eight years.

Since World War II, the longest bull market in U.S. stocks lasted for almost nine-and-a-half years. The shortest sputtered out after just 13 months. On average, bull markets last for slightly less than five years, according to Fortune magazine.

So, how much longer will this bull market persist? No one knows.

In fact, financial professionals have different opinions about the future of the markets. Some believe this bull market will plod ahead, while others believe a bear may be prowling. Often, these beliefs reflect specific aspects of the market. For example:

Economic factors: In late May 2017, chief investment officer and founding member at Advisors Capital Management, Charles Lieberman, wrote in Bloomberg View that he expects the bull market to continue. “The market has it essentially right: U.S. economic growth is continuing at a moderate pace, an economic recovery is finally underway in Europe, inflation is under control, corporate profits are rising, and there is some prospect for tax reform and deregulation, even if whatever gets implemented is less than what is really needed. These conditions imply continued growth in corporate profits.”

Stock market valuations: While fundamentals are a critical component in assessing company value, earnings must be considered in conjunction with stock price to determine whether a company’s shares are fairly priced.

Nobel laureate Robert Shiller, Sterling Professor of Economics at Yale University, told CNBC, “[The U.S. stock market] hasn’t been this overvalued except for a couple of times in history – around 1929, around 2000…so I’m not saying pull out of the market – I’m saying it looks dangerous now, but it could keep going up.”

Corporate profitability: Jeremy Grantham of GMO doesn’t expect a significant adjustment in valuations until interest rates begin to move higher, a change that may take place over an extended period of decades. Grantham writes, “If you are expecting a quick or explosive market decline in the S&P 500 that will return us to pre-1997 ratios (perhaps because that is the kind of thing that happened in the past), then you should at least be prepared to be frustrated for some considerable further time: until you can feel the process of the real interest rate structure moving back up toward its old level.”

Bull markets are often interrupted by corrections, which are declines of 10 percent or more in the value of the market. Eventually, bull markets end and bear markets begin, signaled by a 20 percent or greater decline in the value of the market.

When the market corrects, or a bear market arrives, it’s important to keep your wits about you. A drop in stock market valuations often creates buying opportunities. It may be better to stay calm and refuse to sell low. Historically, after all, bull markets follow bear markets.

Antoine Williams is an investment advisor in Shelburne.

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