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Are We In A Bull Market? Danger, Will Robinson, Danger!

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Are We In A Bull Market? Danger, Will Robinson, Danger!

July 7, 2015

by Baijnath Ramraika, CFA and Prashant Trivedi, CFA

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The low-yield environment manufactured by central banks has encouraged and precipitated yield-seeking speculation. Investors and speculators alike have taken up a near-religious conviction in the demi-god status of central bankers. Will these central bankers continue to enjoy their god-like status indefinitely or will they disappoint their followers?

In one of our earlier articles, US Equities: Overvalued or Undervalued, we surveyed the historical experience of valuation tools. In that article, we observed that the U.S. equity markets are priced for very low subsequent investment returns. This article adds to the historical experience by providing an overview of the potential risk that investors face, should we enter a bear market.

A market on steroids

Since the depth of the March 2009 bottom, the U.S. stock markets have more than trebled, having risen by about 215%2 over a period of 75 months. Figure 1 shows the 75-month rate of change for the S&P 500 Index for the last 140 years. The reason for using a 75-month rate of change is that the length of market’s current move from its trough is 75 months. Clearly, the current rate of change is in extreme territory and is exceeded only by three other market up-moves: the roaring bull market of twenties leading into the Great Depression, the bull market of the fifties and the technology boom. Further, the trajectory of the up-move is similar to that of the market leading into the highs of 1929 and the highs in 19383.

We have had a market on potent steroids.

Figure 1

  1. This article is inspired by the talk delivered by Benjamin Graham at University of California, Los Angeles, on December 7, 1959. You can find an article based on Benjamin Graham’s talk here.
  2. As evidenced by S&P 500’s move from the lows in March 2009 to recent highs in June of 2015.
  3. Do not be fooled by the Rate of Change (RoC) chart in Figure 1. Just because the RoC peaked doesn’t mean that the markets had a decline immediately afterward. All it means is that the rate of advance slowed.

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