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Now We Are Six

Many investors are feeling a bit nostalgic about this bull market, wishing they had participated more actively in its development, as it will celebrate its sixth birthday on Monday, March 9. Indeed, one mustn’t Pooh Pooh a sixth birthday, as it is a special accomplishment. Only three other bull markets (out of 12) since WWII have lasted this long. This bull market gained 12% in its sixth year, versus the median of 19% for all sixth-year bulls. However, the current bull market has increased a total of 211% since inception, which is higher than any of the other three sixth-year bull markets.

The next logical question is “Can we make it to year seven?”:

  • This year’s 7.7% year-over-year increase in four-quarter EPS is consistent with the long-term median of 7.5%. In year seven, growth accelerated to a median 11.4% EPS growth rate.
  • The recent weaker-than-expected reading on annualized Real GDP (+2.2%) is still fairly close to the long-term median increase of 2.9% during sixth-year bull markets. During year seven, GDP growth averaged 4.2%.
  • The yield on the 10-year Treasury bond currently hovers around 2.0%, well below the median of 4.7% by the sixth year of a bull market.
  • The yield curve is also the steepest that it has ever been at the end of year six.
  • While the S&P 500’s current P/E on trailing 12-month operating of 17.8 is high, relative to the long-term median of 15.0, it may be justified by an inflation rate that is well below the long-term median.
  • Finally, the P/E on trailing EPS and the year-over-year % change in headline CPI sum up to 17.6X, which is well below “fair value” implied by the Rule of 20. Indeed, the median Rule of 20 level at bull market tops since 1948 was a shade below 22.

So there you have it. Investors are preparing to celebrate this bull market’s sixth birthday. In addition, early indications point to a good chance of celebrating year seven. Yet this is one of the few times in which history might not even be a good guide (for we know it’s never gospel), due to the limited number of times bull markets have made it this far. So like maritime explorers of old who have entered rarely sailed waters, it might be wise to ignore prior observations and proceed with caution by relying on frequent soundings for safe passage.

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