The bull market in stocks turned 10 in March, which makes it elderly by market standards. Has this bull run its course, or is it still on solid footing?
U.S. large-cap stocks gained 13% in the first quarter, which was the biggest quarterly increase in 10 years. We think the bull market has further to run – stocks can continue to rise over time but probably not at that pace. The good news is that historically, bull markets haven’t died of old age. They’ve been killed off by rising inflation, sharply higher interest rates, a bubble that bursts or an external shock, which we don’t believe are today’s main concerns.
Since recessions often start shortly after a bull market ends, those are also some of the indicators that have signaled past recessions. We’re currently seeing many signs of slower growth but few signs of recession. In our view, that puts us in the later part of the cycle but not at the end. Stocks are attractively valued, interest rates remain low, and the fundamentals are solid, which is why we have a generally positive outlook for global equities.
Many recent indicators have improved, and trade concerns have diminished, but it’s realistic to expect some disappointments as economic and earnings growth rates slow. We see pullbacks as opportunities for investors based on the positive fundamentals. The S&P 500’s price-to-earnings ratio is near its long-term average at 16.7x, suggesting stocks aren’t overvalued. Corporate earnings may fall in the first quarter, since 2018’s earnings got a boost from last year’s corporate tax cut, prompting short-term concerns. Nevertheless, we expect earnings to rise modestly over the rest of the year, helped by growing sales.
The pace of economic growth is slowing but still positive, supported by solid job growth with rising wages. Inflation has remained near 2%, allowing the Federal Reserve to pause its sequence of interest rate hikes. That’s important because the recent decline in interest rates encourages business investment and is likely to help the expansion last longer, extending the positive environment for investors.
In 2018, investors worried rates would increase too quickly. And signs of slower growth early this year prompted the Fed to decide it no longer needed additional rate hikes, suggesting it’s likely to leave them unchanged for the rest of the year. The Fed’s pivot from hikes to pause was a key reason for the strong performance of both stocks and bonds in the first quarter, and we believe low rates should continue to provide support going forward. But the Fed’s policy could change if inflation jumps or the economy slows more than expected, since it has emphasized that it will react to the economic data and adjust its policy accordingly. That’s another reason to stay prepared for possible volatility ahead.
Slower-than-expected economic growth in China and Europe has led to worries about a global recession. Although Europe remains weak, China’s manufacturing indicators returned to expansion in March. Monetary policies in Europe, Japan and China are still providing stimulus, and China and other countries have announced fiscal stimulus policies as well, which could improve prospects for growth later this year.
Many investors are focusing on global policy risks, and those have resulted in an overly pessimistic outlook for global growth, in our view. We think low valuations have created attractive investment opportunities in developed and emerging-market equity investments, if appropriate for your situation.*
It’s difficult not to be concerned, but political uncertainty has been high for several years, and the impacts have been less than anticipated in most cases. What’s important is to avoid letting your hopes or fears drive your investment decisions. Politicians are experts at producing headlines, and those with the most extreme views usually attract the most attention. Keep in mind, though, that those who are elected are limited by the process and competing demands.
The political process isn’t always smooth or quick, but we think investors should remain optimistic and remember that the U.S. and other democracies have a long track record of increasing prosperity.
*Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international and emerging-market investing, including those related to currency fluctuations and foreign political and economic events.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
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