The US stock market has had its seven fat years. This week saw the seventh anniversary of the S&P 500’s post-Lehman low on March 9, 2009. The rally since then has been remarkable by any standard — but the evidence is growing that the fat years may now be over.
US stocks’ gains have been achieved in an environment of extremely low inflation, so they have been meaningful by any yardstick. By comparison with both bonds (represented by the Barclays Aggregate) and gold, their gains since the low are around 250 per cent:
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Further, the gains have increasingly been restricted to the US itself. The S&P has now outperformed the FTSE-All World index excluding the US by some 66 per cent since the low was recorded. Most of these gains have been logged since the brief 20 per cent fall in 2011, which was driven by the decision by Standard & Poor’s to downgrade the US sovereign credit rating.
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Within the market, there have been 10 “ten-baggers” that have increased share price by tenfold or more. They are a disparate group of companies, including “fallen angels” such as Fifth Third, the Cincinnati-based bank that had been the highest-rated US bank during the 1990s and then saw its share price collapse, but also well-established growth companies such as Starbucks, which was more than 80 per cent below its high when the market bottomed in 2009. Its recovery since then has been astonishing
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Judged by index points, the companies that added the most to their market value were more predictable, and were led by tech titans Apple, Microsoft and Alphabet (formerly Google), closely followed by Amazon. All had dominant well-defended positions in 2009, and were obviously well placed to grow in a recovery. The biggest winners also included JPMorgan and Wells Fargo, the two big banks that had been strongest entering the crisis, and were able to use it as an opportunity to bulk up with acquisitions.
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Over this period, oil first rallied and peaked, and then went into a prolonged decline. This had much to do with US outperformance of the rest of the world. Remarkably, even after the recovery of the last few weeks, crude oil is cheaper now than it was at the bottom in 2009:
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The weakness of energy prices was also reflected in sectoral performance, which was widely divergent. Consumer discretionary stocks led all sectors — despite widespread complaints that consumers were still not spending — while the energy sector was weakest:
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Can the bull market persist? The weakness of the rest of the world, in an era when S&P companies derive a large chunk of their earnings and revenues from outside the US, gives cause for concern: as the earlier chart above shows, the FTSE All-World excluding US index is now in a bear market, more than 20 per cent below its high. It is hard to see how this can coexist with continued gains in the US.
Further, many have been concerned by the way the rise in the S&P 500 closely mapped the rise in the Federal Reserve’s balance sheet. That steady advance ended, to be replaced by a choppy trading at and around the level of 2,000, just as bond purchases ended in late 2014:
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Valuation and earnings also give reason for concern. The bottom came with earnings being written down sharply, and earnings multiples comfortably below their historic lows. Now, cyclically adjusted earnings multiples are close to their high point from 2007, and above their highest point from the bull market that peaked in 1966. Meanwhile, earnings per share have been declining slowly for more than a year:
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In another indicator that the bull market is growing old, or maybe ended altogether, there has been a sharp shift in the relative performance of small-cap stocks. They led large-caps, and particularly “mega-caps” in the Russell Top 50 index, for most of the rally: for the past two years they have sharply underperformed.
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