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Stocks have been on quite the run.
While 2022 was one of the worst years in stock market history, the market has roared back in 2023.
At this point, the S&P 500 index is actually up over the last year and officially entered a new bull market two weeks ago.
But that begs the question: how long can this bull market last?
While nobody can know the answer to that question with certainty, we can make an educated guess.
And I think you’ll like the results.
The Drivers of a Bull Market
One term I often throw around is secular bull market.
A secular bull market is a market that is driven by forces that could be in place for many years, causing the stock market to rise over a long period.
A few of those “forces” include:
Sustained Economic Growth
Accommodative Monetary Policy
Technological Innovations
Positive Market Sentiment
Long-Term Investment Themes
And right now, US markets are checking a lot of these boxes.
First the Good News…
Depending on where you get your news, it may seem like the US economy is struggling.
While inflation is still running above trend, most “key” economic indicators are holding up fine. For instance, GDP growth - while slowing - continues to be positive…
…while unemployment is currently near cycle lows. With inflation falling, the US economic growth engine appears to be in good shape.
Next, we’re experiencing a major technological innovation boom with the advent of consumer-facing artificial intelligence technology like ChatGPT. That’s in addition to developments in cloud computing, clean energy, and e-commerce.
And the market agrees, as AI-related stocks have driven most of the market’s gains in 2023 (you can see my top AI stocks here):
And lastly, we have multiple long-term investment themes (i.e. “mega trends”) working in the market’s favor. That includes positive demographic trends in the US, de-globalization, and the growing new investor class.
While we’ve checked three of the five boxes needed to confirm a secular bull market, there are still some red flags to keep an eye on.
…Then the Bad News
The Federal Reserve is currently not being very “accommodative.”
For instance, interest rates are near a 15-year high…
…which tends to slow economic growth as it makes it more expensive to borrow money and run a business.
That said, the “futures market” expects the Fed to be more accommodative (i.e. lower interest rates) in the next 12 months…
…meaning while they’re restrictive now, they will likely “loosen” monetary policy in the next year.
Last on the secular bull market checklist is positive market sentiment. The latest AAII Sentiment Survey (which measures market sentiment) shows many investors are still pessimistic on the markets:
After such a tough market in 2022, this isn’t terribly surprising.
In total, three of the five secular bull market criteria are currently met. And a fourth will likely be triggered in the next year.
Therefore, logic dictates that we are likely still in the secular bull market that started years ago.
And if that’s the case, investors should be very optimistic about stocks over the next few years.
It Pays to Be a Stock Market Optimist
Secular bull markets tend to last 16-20 years. For instance, the US was in a secular bull market from 1949 to 1966.
This bull market lasted for 17 years and saw the S&P 500 rise 31% per year.
But it wasn’t the last; there was another secular bull market from 1982-2000:
This bull market lasted for 18 years and returned a whopping 70% per year!
In comparison, the current secular bull market that started in 2011 is child’s play:
If history is any guide, this bull market should last from another 3 to 8 years at minimum. That represents between 114% and 304% worth of gains for the S&P 500.
And while interest rates are still elevated, they are still well below levels seen during previous secular bull markets. This means it’s very likely this bull run could last significantly longer once the Federal Reserve begins to lower interest rates (likely later this year).
Keep Your Eye on the Long-Term Prize
We are currently 12 years into this secular bull market causing some analysts to predict the bull market is over (or nearly over).
I am not one of those analysts. To me we have the perfect backdrop:
The economy is moving along, but not too fast and not too slow
Earnings continue to come in better than most expect, and I think that
trend will continueMost investors remain at worst bearish (and at best neutral) on stocks and therefore are underinvested
And when the Fed starts easing monetary policy, we’re going to enter into the “goldilocks” period for markets (which I’ll talk about in a future issue).
Will there be pullbacks and flat periods for the stock market? You bet, but they are just that: pullbacks in an ongoing secular bull market.
So, what are we to do as investors? Well, in secular bull markets you want to own stocks, and you own them until the secular bull market is over.
And that’s exactly what I plan to do.
Stay safe out there,
Robert