There is an old saying on Wall St that still rings true today, “the market climbs a wall of worry.” The headlines everyday reminds us about the many worries. I mentioned on Fox Business last week that the price of oil may have already spiked to its upper range because of the conflict in Iraq. This is important because most people feel that oil prices will go parabolic. It could happen, but then the US could gain access to oil supplies here at home and in Canada. While it is very difficult to know what will happen in Iraq, I want investors to focus on the long-term.
Markets rallied strongly last week and closed at new records for the S&P 500 and Dow. Though stocks ran in circles early in the week, they picked up the pace after Wednesday’s reassuring Federal Open Market Committee (FOMC) meeting announcement. For the week, the S&P 500 gained 1.38%, the Dow grew 1.02%, and the Nasdaq added 1.33%.1
Federal Reserve and Stocks
There were no surprises from the Fed’s June Open Market Committee meeting. The FOMC announced another $10 billion cut to quantitative easing, lowering monthly bond purchases to $35 billion, and emphasized its commitment to data-driven decision-making with respect to future interest rate hikes. The Fed also released economic projections for the rest of the year, forecasting an unemployment rate of 6.0%-6.1% at the end of the year. On the down side, the Fed lowered expectations for annual Gross Domestic Product (GDP) growth, projecting that the economy will grow just 2.1%-2.2% this year.2 Investors counted the meeting as a win, reassured that the Fed is still willing to support markets.
Stocks jogged past more milestones last week, producing record highs for the S&P 500 and the Dow on Friday. Such performance naturally leads to the question: Is the bull market ending? By the calendar, you might think so. The average bull market lasts 62 months,3 and we passed that mark earlier this year, but there are several good reasons for why we aren’t looking for the end just yet:4
- Economic growth is still moderate. Bull markets often end when the economy gets overheated and investors start worrying about the next recession. GDP growth is still below-trend, and current forecasts show that it probably won’t crack 3.0% until 2015.5 Future economic growth potential may give this bull market a second wind.
- There’s still money on the sidelines. Many investors and corporations have piles of cash sitting around uninvested. When these stragglers finally start buying into the trend, the inflow of cash may send markets higher.
- Plenty of bull markets last longer than 62 months. The one between 1987 and 2000 lasted roughly 150 months, and the rally between 1949 and 1956 lasted about 87 months.6
Now, we can’t assume that markets will continue their upward progress indefinitely. As we discovered in the first few months of the year, declines do happen. One of the benefits of an active management strategy is that we can use these interruptions in the overall trend to cherry pick solid investments at attractive prices. Overall, we’re still cautiously optimistic about market performance going into the latter half of the year. We’ll know more about future prospects as Q2 economic data and earnings reports trickle in over the coming weeks.
1 http://goo.gl/UVAvcx
2 http://bit.ly/1kYSvoC
3 http://bit.ly/1m6vR9A
4 Hat tip to Steve Reitmeister
5 http://bit.ly/1kYSvoC
6 http://bit.ly/ToUqYI
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