Clock Ticks on Bull Market With No New High for Stocks in a Year

www.bloomberg.com

By Anna-Louise Jackson and Lu Wang

• Hitting a one-year anniversary without a record is rare
• Fed adds to uncertainty with minutes, speeches by members

An up week in the S&P 500 Index did little to alleviate the frustration of U.S. investors who have now watched stocks go nowhere for a full year.

Yes, the S&P 500 rose over the last five days, halting a three-week slide that had been the longest since January. But the rally didn’t come close to ending a 12-month fallow period that the index has spent stuck below its all-time high. The stretch is one of the longest in the history of U.S. bull markets.

“It’s been a long time without the market breaking through to new highs and the ultimate outcome of that can be summed up by two words: frustration and fatigue,” said Eric Wiegand, senior portfolio manager at the New York-based Private Client Reserve of US Bank, which oversees $128 billion in assets. “This really hasn’t been a bull market that’s been characterized by euphoria or broad-based speculation. It’s been the byproduct of a real lack of conviction and uncertainty on the part of investors.”

On Monday, the S&P 500 will extend its streak without a record to 253 trading days, matching the drought that lasted through February 1995. Only two other long-term rallies went without new highs for longer -- 272 days through 1984 and 361 days through 1961. Bull markets end when a benchmark index falls 20 percent from a record.

More often than not, such dry spells are ominous for equities. Among the 13 instances since 1946 that began with stocks going as long as they have now without posting new highs, 10 ended in bear markets.

On the bright side, on the three occasions when bull markets survived such slumps, U.S. equities went on to rise 22 percent in the year after a new high was reached. Moreover, the American stock market is usually much farther away from its most recent peak than it is now. On any given day since 1946, the S&P 500 has been about 14 percent from a record, data compiled by Bloomberg show.

Reversals have been the market’s signature in 2016, with the S&P 500 rebounding from its worst start ever before failing to sustain a rally above 2,100, a level that has repeatedly thwarted bulls. The benchmark gauge alternated between gains and losses in the past six days, ending the week up 0.3 percent for the smallest weekly move this year.

“It’s hard to latch on to a theme when there is no momentum and thrust,” said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “It erodes the confidence of the bulls, but it also frustrates the bears,” he said. “It’s almost like flipping a coin, and instead of landing on heads or tails, it lands on the edge.”

Underpinning the uncertainty in 2016 has been speculation about the pace at which the Federal Reserve will raise interest rates, as central bankers and investors alike weigh the economy’s ability to withstand tightening even amid signs of economic strength. Add to that corporate profits mired in the worst decline since the financial crisis and it equals an anniversary with little cause for celebration.

“Psychologically, the amount of time without a new high is going to play a role,” said David Mazza, head of ETF research at State Street Global Advisers in New York. “We’ve had fairly lackluster earnings growth. The only reason stocks are up this year is multiple expansion.”

The S&P 500 rose 5.7 points this week to close at 2,052.32, leaving it almost 4 percent blow its record on May 21, 2015. Shares of energy, technology and financial companies rose, with rallies of at least 1.4 percent, while stocks considered to be defensive in nature -- consumer-staples, telecom and utilities -- slumped more than 2 percent.

The Fed’s minutes from its April meeting, along with speeches by several members, reignited the market’s obsession with rates. Officials have signaled they may raise official borrowing costs as early as June, sending the market-implied probability of such an increase to 28 percent, up from just 4 percent at the start of the week, according to futures data compiled by Bloomberg.

A measure of investor anxiety also rose, as the Chicago Board Options Exchange Volatility Index climbed 1.1 percent during the five days, along the way hitting a two-month high. Meanwhile, the valuation for the S&P 500 -- now at a multiple of 19 times earnings -- is 4.1 percent above its one-year average.

In the absence of a re-acceleration in earnings growth or investor willingness to push valuations higher, any gains are likely to come slowly, said Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co., which oversees $8.5 billion in Bryn Mawr, Pennsylvania. “Unless you see one of those, it’s hard to make the case for that to happen. We had a market that was already starting to wobble a bit.”

After surpassing the 2007 peak for the first time in March 2013, the S&P 500 has made 108 records in this bull market. Since 1946, the gauge spent some part of 37 calendar years at levels that exceeded any past peak, or 53 percent of the total. While the frequency suggests a fair chance for 2016, the years with fresh highs tend to be clustered and the waiting for the next record can last long. In the worst case, the S&P 500 didn’t hit any highs for 25 years following the 1929 crash.

“The past 19 months have been the most difficult stock market I have ever experienced in more than 50 years of investing,” said Jeffrey Saut, chief investment strategist at St. Petersburg, Florida-based Raymond James Financial Inc., which oversees $500 billion. In bear markets, “at least we knew stocks were going to go down. However, over the past 19 months the up one session, and down the next, has been extraordinarily frustrating.”