As all three U.S. equity indexes have locked in gains close to 15 percent this year supported by quantitative easing from the Fed and decent corporate results, investors are left deciding how much upside is left in the market and whether there is still more room for the bull market to run.
The bullish case for equities point to the low return for investors in the bond market and argue that equities are still relatively cheap at this level even with new highs being reached nearly day after day.
Bullish investors are quick to point out that the current 4 year bull rally in equities matches the impressive bull run in the late 1990’s even though stock valuations are now 28 percent lower, signaling that now is still a good time to buy.
Shares in the S&P 500 are trading at 18.6 times annual profit, below the average 25.7 level in the 1990s.
The bearish case for equities understands that the economic fundamentals that supported the equity market in the late 1990’s are different compared with today. The current GDP level for the 1st quarter of 2013 is in the 2 percent range compared with the 4 percent level during the late 1990’s from 1996-2000. Also, many tech companies were not valued on real earnings growth in the late 1990’s and global growth today is arguably weaker with much of Europe still in recession and the Chinese economy cooling.
Jason Pride, Glenmede Director of Investment, spoke about the need for more stability in the market on CNBC’s Closing Bell aired yesterday.
“At the end of the day we have to look at the markets here and think that with a 15 percent run this year on the back of a strong double digit run last year. How long can we run at this sort of pace though on very mediocre data?” Pride asked.
“Yes things are getting better and the Fed may have an opportunity to pull back from its bond buying, but the reality here is that the markets have moved really fast and really far and its likely going to be some bumps along the road that come from areas that we don’t even expect at some point in time. So some stability is worthwhile” he said.