As a result, fewer stocks are flagging momentum warnings. At Monday’s close, 67 members in the S&P 500 posted readings above 70 in their 14-day relative strength index, one third of what was seen seven months ago.
“I would be more concerned if there weren’t worries in the market. That would mean you get an euphoric blow-off,” said Malcolm Polley, who oversees $1.2 billion as president and chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania. “The fact that there are worries means people are realistic in their assumptions,” he said. “The market always climbs a wall of worries -- always.”
Skepticism has been the signature characteristic of this bull market. Since the rally began in March 2009, fear has been a constant companion, from Europe’s debt crisis in 2010 to the downgrade of U.S. sovereign rating in 2011 and China’s currency devaluation in 2015. Now it’s fear of peaking growth.
Yet, what hasn’t killed this bull market has usually made it stronger. Five 10 percent corrections later and $300 billion pulled out of U.S. equity ETFs and mutual funds, the decade-long advance just equaled the No. 1 title from the one during the dot-com era.
Is it closer to the end of the cycle than to the start? Sure, nobody doubts that. And there are tangible signs that equity valuations are getting stretched. Sure, the S&P 500 trades at 2.2 times sales, in line with the peak levels seen in 2000. But look at the median price-sales ratio for the index’s members, which strips out market-cap bias: it’s twice as high. In other words, overvaluation was highly concentrated to tech giants in the years of internet frenzy. Right now, everything is expensive.
While bulls take comfort in forecasts for sales and profits to keep rising over the next two years, helping ease the multiple pressure, skeptics find fault in the downward slope of the growth trajectory. Both S&P 500 revenue and earnings will increase at roughly half this year’s pace in 2020, according to analyst estimates compiled by Bloomberg.
“The earnings and economy growth were better. The question is, can you do it again?” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute.
Bailing out too early can be costly. A study by Bank of America Corp. on market peaks since 1937 shows that being uninvested in the last year of an advance meant foregoing one-fifth of the rally’s overall return. While every episode is different, that math roughly translates into additional 550 points in the S&P 500, if the bull market goes on for another year.
Rather than worrying over what could trigger the next drawdown, investors should focus on things that could drive the market higher, according to Steve Auth, chief investment officer of equities at Federated Investors Inc. His list of positive catalysts include: persistently subdued inflation, a signal from the Fed to end rate hikes, easing trade tensions, and a lasting trend in better-than-expected economic and earnings data.
Bears “may be waiting in vain” for the next selloff, Auth wrote in a note to clients this month, reiterating his call for the S&P 500 to end the year at 3,100. “Stocks running out of excuses for not going up.”