In March 2009, U.S. stocks rebounded after the financial crisis and started what is currently the third-longest bull market in history. While the Obama Administration and Wall Street are busy championing the economy, the fact is that the U.S. economy is not doing that well and the bull market is in serious jeopardy.
Wall Street Nervously Celebrates Seven-Year Anniversary of Bull Market
No one knew how far stocks were going to fall during the financial crisis. By March 2009, the S&P 500 and Dow Jones Industrial Average both lost around 55% of their value.
While many were calling for further declines, the markets rebounded. Thanks in large part to the Federal Reserve’s generous bond-buying program and artificially low interest rates, the stock market has been enjoying the third-longest bull market in history.
Since bottoming at 666 in early March 2009, the S&P 500 has soared 197%. Within the same timeframe, the Dow Jones Industrial Average has risen 161%. While not as dramatic, both the S&P 500 and Dow Jones have made strong gains over their October 11, 2007 intra-day highs. The Dow Jones has posted a 20% gain, while the S&P 500 is up 25%.
Despite the strong numbers, there are more than enough reasons to think the bull market is on its last legs. Most economists point to the duration of the bull market and the weak global economy as the main reasons why the bull market may be in jeopardy.
While this is true, there are a lot of additional reasons that point to the end of the bull market.
This Is Why the Bull Market Is in Jeopardy
The Dow Jones and S&P 500 are only as strong as their underlying stocks. And the stocks are only as strong as the economy supporting them. When you consider the state of the U.S., investors should be worried.
For starters, U.S. stocks threw up some pretty weak numbers in the fourth quarter of 2015. The blended earnings decline for S&P 500 companies was -3.3% in the fourth quarter, making it the first time the S&P 500 has seen three consecutive quarters of year-over-year declines in earnings since the first quarter of 2009 through the third quarter of 2009. (Source: “Key Metrics,” FactSet, February 26, 2016; http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_2.26.16.)
The blended revenue decline for the fourth quarter was -3.9%. This represents the fourth consecutive quarter in which revenue has declined. The last time this happened was during the Credit Crisis of 2008/2009.
And the outlook for the first quarter is not encouraging. That said, while earnings and sales are down, stocks really haven’t given up as much ground as one would expect. Even after a terrible start to the year, the S&P 500, according to the Case Shiller CAPE P/E Ratio, is overvalued by 59%.
Over the last 10 years, the CAPE ratio average has been 15. Today, it’s at 25.3. The only times the ratio has been higher were in 1929, 2000, and 2007. All three instances were followed by a collapse. (Source: “Cape Ratio,” Yale University, last accessed March 8, 2016; http://www.econ.yale.edu/~shiller/data.htm.)
U.S. Economic Figures Point to End of Bull Market
U.S. stocks will only see real sustainable growth when the economy is doing well. We’re a nation of spenders. We need good jobs and disposable income to keep the U.S. economy chugging along.
Now, President Obama has been taking a lot of credit for turning the U.S. economy around. But let’s really look at his numbers. After all, Obama is the one that said, “The numbers, the facts don’t lie.”
According to a recent report, in February, earnings of salaried workers posted their biggest month-to-month decline since March 2009—down 0.5%. The last time earnings fell that much in a month was in December 2008. So, on one hand, more Americans are working. On the other hand, they’re making less. (Source: “Fresh Evidence That Obama’s Economy Is Getting Moldy,” Investor’s Business Daily, March 9, 2016.)
The IBD/TIPP Economic Optimism Index fell 2.1% in March to an overall reading of 46.8, its lowest level since November. A reading above 50 indicates optimism, while a reading below 50 indicates pessimism. March’s data pushes the index below the 12-month average and is pretty much where it stood when Obama took office. (Source: “IBD/TIPP Poll: Economic Outlook Bleakest Since December 2013,” Tipponline.com, March 2, 2016; http://www.tipponline.com/news/economy/706-ibd-tipp-poll-economic-outlook-bleakest-since-december-2013.)
What about jobs? Obama’s been pretty vocal about the 14 million jobs that have been created since the labor market bottomed six years ago. Interestingly, job growth hasn’t kept pace with population growth, which has increased by 15.6 million.
But never mind that; let’s get back to the jobs! According to the U.S. government, 78% of the jobs created were part-time. On top of that, 82% of those were in the food services and retail industries. Let the spending begin!
Is it a real surprise that in the fourth quarter of 2015, U.S. gross domestic product (GDP) inched along at a one-percent annualized growth rate? That’s pretty abysmal for the world’s biggest economy, one that the Federal Reserve has tossed $3.5 trillion at and one that was normally in the three percent to four percent range. (Source: “Gross Domestic Product: Fourth Quarter and Annual 2015 (Second Estimate),” U.S. Department of Commerce, February 26, 2016.)
Speaking of GDP, since Obama took office, real annual GDP has never topped 2.5%. This makes Obama the first president in modern history to have achieved this dubious distinction of dismal growth. (Source: “GDP Growth (annual %),” The World Bank, last accessed March 8, 2016; http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1.)
So, when it comes right down to it, investors and analysts might be right to worry about weak economic growth coming out of China, Japan, and Europe; weak commodity prices; and negative interest rates. But there’s enough going on here at home that could cripple the bull market.
In the midst of all of this economic gloom, the Federal Reserve is considering a rate hike next week. Any move to the upside would wreak havoc on the markets. And cobble an already fragile economy.