The biggest fear about the current secular bull market keeping many expert observers up at night is the pervasive consensus of bullish sentiment itself. As the U.S. economy continues to outperform many of its global rivals, financial experts can’t help but notice that the gap between the gains of American equities and foreign ones is greater than the growth gap in the underlying economies.

The upshot is that some of the bull market’s loudest cheerleaders, such as Wharton professor Jeremy Siegel and Wells Capital’s chief investment strategist Jim Paulsen, are sounding a cautious tone as 2015 approaches. In various television appearances, Siegel has indicated that he expects a 10% correction in 2015 while Paulsen thinks that cheaper European equities might well outperform American stocks over the next year.

A 10% correction of the sort predicted by Siegel would be good news and could extend the longevity of the bull market, according to Liz Ann Sonders, chief market strategist for Charles Schwab. Prevalent bullish sentiment is becoming stretched and is a source of concern in her view.

If everyone is leaning to one side of the boat, a negative surprise could tip it over. Her biggest fear is a 1987-style “melt-up.” The S&P 500 climbed more than 40% in the first eight months of that year, only to drop more than 30% in October and wind up the year with a gain of only 5%. Speaking in New York in early December, Sonders noted that the 1987 crash occurred within the longest secular bull market in history, which began in 1982 and lasted 18 years.

The question she gets asked most frequently uses a baseball metaphor: “What inning is the bull market in?” Her answer is that it may be the seventh inning, but she quickly qualifies that by adding that baseball games have been known to last 12 innings or longer.

Uncertainty about Europe, China, Japan, the strong dollar and the collapsing price of oil (and the effect of all these things on the U.S. economy) continues to perplex investors as they search for ways to play the crosscurrents. Richard Bernstein, who runs the advisory firm named after him, remains optimistic about U.S. equities, but the weak Japanese yen is prompting him to overweight Japanese exporters of finished goods.

Paulsen of Wells Capital likes euro zone equities, and relative valuations are only part of his calculus. He reasons that the disparity between U.S. and European equities parallels the gap that existed in the late 1990s. Shortly thereafter, European stocks outperformed U.S. rivals for an extended period. In a letter to clients, he noted that while U.S. growth and employment will outpace Europe’s, the gap will narrow.

Matthew Coffina, editor of the Morningstar StockInvestor, says, “The market is mostly fully valued and investors should be looking at a longer time-ride of four to 10 years. Returns of 9% to 10% a year are unrealistic.

“The big takeaway,” he says, “is that investors should moderate their expectations. Investors who sold out [of the market] during the [2008] crisis and are thinking about getting back in should think carefully about how they behaved in past downturns.” He doesn’t think the market is poised for a major acceleration in the foreseeable future.

Coffina writes that Morningstar now sees relatively few opportunities in industries such as consumer staples, regulated utilities and real estate investment trusts. But Morningstar likes a few companies that produce leading brands and have exposure to the emerging markets.
Robert Johnson, director of economic analysis for Morningstar Inc., Chicago, says 2015 could bring more of the same: Overall GDP growth will likely remain stuck in the 2.0% to 2.5% range. “The good news is the economy is growing again,” he says. “The bad news is that it isn’t likely to get a lot better.”

What worries Johnson is that Europe will mismanage its slowdown, and that could lead to a dissolution of the euro zone. Or it might end in bank failures that hurt all financial markets.

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