GUEST BLOG / By Craig Fehr, Principal, Investment Strategist, with the investment firm of Edward Jones.
The last week in August showed U.S. stocks advanced to record highs for the first time since the end of January, and are now up more than 7% year-to-date. Stocks posted their largest gains on Friday, following Federal Reserve Chair Powell's speech in Jackson Hole, where he noted that while the committee's measure of inflation has moved near its 2% target, an inflation overshoot or an overheating economy does not seem likely. This will likely keep the Federal Reserve on pace to raise short-term interest rates at a measured pace, helping extend the bull market.
Bull Market Moves Into the Top Spot as Earnings Shine
Rising political uncertainties – News of legal issues related to former Trump associates ignited questions over the potential political implications for the president. Markets absorbed the news fairly smoothly. This is consistent with our view that markets take their longer-term direction from fundamentals, not politics. That said, markets dislike uncertainty, so as this situation unfolds we're likely to see short-term knee-jerk reactions.
Steady as she goes for the Fed – Comments from Fed Chairman Powell at a summit last week supported the view that the U.S. central bank will continue to raise rates at a gradual pace. He noted that the economy has strengthened, and with low unemployment and firming inflation, we think another rate hike is highly likely next month.
The longest bull – The current bull market passed the 1990s rally last week to become the longest on record, stretching more than 3,450 days. This is a nice milestone and a testament to the durability of this stock market, but we'd note that age has little predictive power over what the bull market will do from here. Similar to a vintage car, its ability to drive cross-country has far less to do with its model year and far more to do with the quality and care of its engine and tires.
In terms of mileage, this bull market has provided a total return of 418% since it began on March 9, 2009, making it the longest and second-strongest run for the S&P 500, still trailing the tech-fueled rally through the 90s in terms of magnitude.
Fortunately, we think the engine remains in good shape, fueled by a healthy economy and rising corporate earnings. Looking at the composition of that 418% gain, 93% came from dividends, 86% came from a rising price-to-earnings ratio, with the largest portion coming from the rise in corporate profits.
With second-quarter earnings announcements recently wrapping up, the 25% increase in profits provided confirmation that this pillar of market returns remains supportive of this bull market extending this year.
Bottom line--This bull market may be vintage by historical standards, but we don't think it's at risk of breaking down. We're monitoring the gauges as some - including moderating global growth, a flattening yield curve, rising policy uncertainties, and gradually more restrictive interest rates – are beginning to signal some wear and tear, but broad fundamentals suggest there's more gas left in the tank. With potholes likely to emerge, now is a good time for a portfolio diagnostic and timely rebalancing to ensure you remain on track toward your long-term goals.
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