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Does the Bull Market Have Room to Run?

By Kate Warne

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The current U.S. bull market in stocks started more than eight years ago, in March 2009. It’s now the second-longest bull market, surviving many typical corrections (declines of 10% or more) and other smaller pullbacks without experiencing a 20% drop. Fortunately, bull markets don’t usually die of old age. They’ve frequently ended when bubbles burst or recessions emerged – and we don’t think either is happening today.

The twin supports for rising stock prices over time, economic and earnings growth, seem to be getting stronger, which is why we think this refueled and re-energized bull can keep charging ahead:

  1. Economic growth – The outlook for economic growth has improved slightly, as consumer sentiment and spending have increased, still fueled by optimism about pro-growth policy changes. Interest rates and inflation remain low, allowing the Federal Reserve to move slowly and cautiously.
  2. Company earnings growth – First-quarter S&P 500 company earnings are expected to increase by more than 9% compared to last year, rebounding from their earlier pause, according to FactSet.

Look forward, not back

Long-term investors have enjoyed this long-running bull market. Since March 2009, the annual average return of U.S. large-cap stocks has been 17.6%. But the price you pay for an investment matters, and a rising stock market doesn’t mean future returns will be that high – especially not every year. Our expected long-term returns for U.S. large-cap stocks are 6% to 8% annually. And since valuations for U.S. stocks are slightly above their long-term averages, returns may be somewhat below average over the next 10 years. 

International stocks have lagged behind their U.S. counterparts during the past few years and, as a result, are more attractively valued, in our view. That’s one reason we expect them to provide higher long-term returns of 7.5% to 10% per year. But investors have focused on near-term uncertainties, including elections, potentially overlooking improving international economic growth. This has created the opportunity we see in international markets. If appropriate for your situation, consider adding broad-based international equity investments to your portfolio.

Reduce risk by rebalancing

Are you wondering why your portfolio returns haven’t matched the market? The answer might be in your mix: Most investors don’t want to take on as much risk as the stock market, so they invest in bonds as well as stocks. Bond returns were lower than stock returns last year as well as since 2009, a trend that continued in the first quarter of 2017, so diversified portfolio returns were lower – but also less volatile.

In a bull market, it’s easy to forget how volatile stocks can be. But here are the facts: In the past 32 years, U.S. large-cap stocks dropped by an average of 14% during the year, even though they rose in most (25) of those years.*

We expect a return to normal market volatility in 2017. If you haven’t reviewed your portfolio with your financial advisor recently, now may be a good time to do so. You may need to add short- and intermediate-term bonds and reduce the amount invested in stocks. When stocks perform better than bonds, they become a bigger portion of a portfolio, making it riskier than you might expect. For example, the chart below shows that an investor who started with a desired stock allocation of 65% could hold as much as 80% in stocks today, and if stocks decline, the portfolio’s value could drop more than expected. Rebalancing realigns your portfolio with the mix of stocks and bonds that is appropriate for your situation, helping you reach your long-term financial goals.

Finding Your Balance: Portfolio Allocation to Stocks Without Rebalancing


Source: Morningstar, Edward Jones calculations; 12/31/2016. Initial allocation of 65% in S&P 500 Total Return Index and 35% in Barclays U.S. Aggregate Bond Index. The S&P 500 and Barclays U.S. Aggregate Bond indexes are unmanaged indexes and are not available for direct investment.

Prepare; don't predict

Polls and pundits seem to have lost their predictive abilities, leaving you wondering which way to turn. We think there’s a better approach. Prepare for a wide range of possibilities with a long-term strategy. The outlook is good, but there’s likely to be more volatility ahead. Stay prepared by making some adjustments, including rebalancing back to your desired mix of stocks and bonds and adding international equities if appropriate.

Important information:

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events. 

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Diversification does not guarantee a profit or protect against loss.

*Source: Bloomberg, 1985-2016. U.S. large-cap stocks represented by the S&P 500 Index

More resources:

Are Stocks a Good Investment Today?

Historically, stocks have provided higher returns than both bonds and cash, but with higher volatility, so are they a good investment today?

Quarterly Market Outlook - 4th Quarter - 2020

This is our perspective on important market and economic topics designed to help you make decisions affecting your long-term financial strategy.

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