This bull market is old – the second-oldest in the past 100 years, to be exact.1 But now the question is – will this market age like a fine wine, getting better with time, or is it more like milk – nearing its expiration? It's probably neither, in our view. With a total return of more than 150% for the TSX and 320% for the S&P 500 since the bull market began in March 2009, its highest returns are likely behind it. However, we do think there's more life left in this positive cycle.
For some context, the average length of the past 13 bull markets was about 1,500 days, making the current phase twice as long as average.2
Market performance over time is primarily driven by fundamental factors – not a timer – and we think the current bull market has more life left in it for two reasons:
- Bull markets don't die of old age. Markets almost exclusively meet their demise at the hands of a recession and/or a bursting bubble. We don’t think the market is close to either at the moment. While stock markets have rallied strongly, there haven't been indiscriminate buying or extreme valuations that typically accompany a bubble. And while recessions are normal, we don't see evidence of an impending economic contraction.
- Second, a bull market has a fundamental foundation. A healthy economic and earnings backdrop is typically what prevents a short-term dip from becoming a prolonged or severe downturn. In Canada, growth has rebounded from the oil-driven slowdown. High consumer debt and a softening housing market pose challenges, but we think the economy will continue to grow at a modest pace. In the U.S., we expect faster growth helped by healthy labour and housing markets and rising confidence among consumers and businesses.
Turning to what's ahead, while the market's broader path may be higher, we don't think the bull market will age as gracefully as it has in recent years. As we progress, we expect a couple of things to happen:
- First, we should be prepared for market volatility. Market swings have been well below average for the past few years, dropping to a 24-year low this year. Historically, when volatility has fallen 50% below its long-term average, it has risen by an average of 25% over the following three months. In other words, periods of well-below-average stock price fluctuations are often followed by large swings. And, we expect market dips are likely to evoke more emotional reactions.
- Second, we might see lower returns. Since the bull market began, the stock market has provided an average annualized gain of 15.5% per year.3 Moving forward, we expect stock returns to be more moderate, with modest earnings growth and a slightly above-average P/E ratio combining to drive returns closer to the mid-single digits.
So how can you stay on track with your long-term goals when the bull market could change in the short term? One way is to make sure your investment portfolio ages well. That means having a well-diversified portfolio along with appropriate expectations for market changes. We recommend the following three steps:
- Rebalance your portfolio. This helps ensure you have an appropriate amount of equity to provide the growth you need to achieve your goals, while also maintaining fixed-income investments, as appropriate, to help reduce your portfolio's sensitivity to market volatility and potential short-term pullbacks.
- Broaden your diversification to look beyond domestic borders. So far in 2017, international equities have outperformed, with U.S. stocks returning 9.6% and overseas large-caps gaining 8.2%, compared to the flat performance of Canadian large-cap stocks.
- And, third, identify a strategy for market swings to be prepared for volatility. This can put you in a better position to avoid overreactions and even capitalize on short-term pullbacks in stock prices that can benefit your portfolio's return over the long term.
Talk with your Edward Jones advisor today to ensure your investments are aligned with your goals for this market cycle – and beyond.