Where Are We in the Stock Market Cycle?

We hear often how the current stock market boom is overextended and ready for a pullback, correction, or even recession. We also know that when it comes to investing, our feelings often betray better judgment and that actions we take with our investment decisions tend to be counterproductive.

One of the most difficult parts of being a successful investor is setting aside our emotions and just sticking to the facts or, as this is commonly referred, “separating the signal from the noise.”

Sure, there are times when markets become “irrationally exuberant” and stocks simply have risen too quickly to be sustainable (like the stock market immediately following the passage of the new tax laws by Congress).

Below are some quick facts that may argue against this idea of the stock market being too highly priced:

  • Corporations’ earnings are at a robust level, consistently outpacing estimates. More importantly, there are no substantial reasons or outsized, systemic risks to warrant an earnings slowdown. This is being proven out by the consistent outpacing of actual vs. estimated earnings. That is, earnings estimates are continuing to be increased for the next 12 months.
  • Valuations still are very reasonable. Today’s PE ratio, a measure of valuation, is at 16.9X earnings using estimated operating earnings for 2018. This is still very reasonable compared with any other time frame dating back to 1960, of an average PE of 16.4. Valuations between 16 and 19 multiple are reasonable and do not indicate an overvalued market.
  • Corporate stock buybacks (when a company uses its own funds to buy its own stock—usually a strong indication of confidence in continuing earnings growth and dividends) continue to rise and are at a normal rate historically. 
  • Stock buybacks are being driven by corporate profits, NOT by debt issuance, as reported and bemoaned by some in the financial media.
  • There are no sectors that are being left behind by other sectors—that is, there is good breadth in earnings across most sectors of our economy. This is important because it indicates a healthy economy across all company sizes and industries.
  • The new tax code has, in a way, more permanently allowed corporations to make higher earnings due to lower taxes.
  • The yield curve is still not inverted. The yield curve (short-term interest rates compared with the 10-year Treasury rate) is still positive. That is, short-term rates are much lower than longer-term rates. This is significant because, before each and every recession, the bond curve has been inverted. Not so at this time.

Now here are the scary/emotional parts of the current stock market:

  • The stock market (S&P 500) is in its 109th month of recovery from the 2008 recession.
  • This is the second-longest bull market since the 1920s.
  • The longest economic expansion since 1920 was 120 months. This is a little less than a year for the current market to reach this record.
  • The comment of “We have to ‘revert to the mean’ at some point, right?” Or “When’s the party going to end?”

You may notice that there’s a distinct difference between the two sets of data. One is empirically based, and the other seems to struggle to maintain meaning if examined under just a bit of honest scrutiny.

The point is to not get distracted by what we may feel is important. Ignore the noise. Breaking records is normal in the stock market, and for the time being, things seem to be looking good! 

More importantly, it’s always better to stay invested and not try to time the market. Timing has led many investors to poor long-term results.