It is often said that bull markets don’t die of old age, but this one is giving it a fair go.
The US stock market has today hit a major milestone, registering the longest bull market in its history.
The UK stock market has also been on a strong since 2009 – its bull run has been broken by a bear market in 2015 and into 2016, though this was relatively short-lived and perhaps is better viewed as a major correction.
The UK looks much more reasonably valued than the US right now, however, which on one measure has only been higher in 1929, before the Wall Street Crash and in 1999, before the tech bust.
It is often said that bull markets don’t die of old age, but this one is giving it a fair go. The US has been on a rampant charge since March 2009, with only a few blips along the way.
Many investors question whether this exceptional period for the US stock market is going to end in tears, though the very fact this issue is so widely raised suggests we are not in the throes of the irrational exuberance of the late 1990s.
Despite the US economy performing well, the valuation of the stock market does give pause for thought. That said, one could have made the same argument for several years and missed out on some handsome returns.
UK investors in US stocks have done particularly well from a combination of strong stock market returns and a weakening of the pound against the dollar. Returns since the financial crisis have been robust from the UK stock market too, though not to the same degree as in the US, and with more choppiness.
The UK stock market is, however, cheaper than the US and has been shunned by UK and international investors alike since the Brexit vote. It now stands near its historical average in terms of valuation, it’s neither cheerfully cheap nor prohibitively expensive, which means it can move in either direction without defying the laws of statistics.
Trying to time the market is notoriously difficult, and is just as likely to leave you out of pocket as quids in. Investors who are concerned about market valuations can take the simple step of setting up a monthly investment plan, which still keeps their savings ticking over while taking advantage of any market dips.’
The US bull run in numbers
The current US bull market started on 9th March 2009, based on closing prices for the S&P 500. Today marks 3,543 days, taking it beyond the bull market of the 1990s which ran from October 1990 to March 2000. Since then the index has more than quadrupled in value.
UK investors have enjoyed even better returns from the US stock market because the pound has weakened. If you had invested £100 in the S&P 500 in March 2009 it would now be worth £455 without dividends, or £555 with dividends reinvested.
The chart below shows the strong run the S&P 500 has enjoyed in recent years.
A bull market is defined as a rise in the index which is uninterrupted by a fall of more than 20 per cent in the index. A bear market is defined as a 20 per cent fall from a previous peak. Meanwhile, a correction is a fall of between 10 and 20 per cent from a previous peak.
The UK stock market has also posted strong returns in the bounce back from the financial crisis, but it doesn’t technically qualify as a bull run as its rise has been punctuated by a bear market in 2015 and into 2016. During this period the index suffered as its heavy weighting towards oil and mining sectors meant the commodity slump was pretty painful, though the US did also suffer a sharp correction too.
While both the S&P 500 and FTSE 100 are near record highs, these are simply price indices and so take no account of value. When factoring in the earnings of companies in these markets to give an idea of valuations, the picture is more nuanced.
In the US, according to the widely used Shiller Price Earnings Ratio, the market valuation has only been at this level in 1929 and in the late 1990s, shortly before the Wall Street Crash and the tech bust respectively (see chart below).
The Shiller ratio charts the current price of the market compared to its inflation adjusted earnings over the last 10 years. Looking at a more short-term measure of valuation, the current P/E ratio on the US stock market (looking at earnings over the last year) is 23.2, which statistically speaking is more modestly elevated compared to its long run average of 16.8, and significantly below the level of 31 times earnings seen in 1999.
In the UK the Price Earnings Ratio on the market is pretty close to its long run average, standing at 15.8 compared to 14.3. In the late 90s at the height of the tech boom the UK stock market’s P/E ratio stood at 26.7.
What should investors do?
Timing the market is notoriously difficult and is just as likely to leave you out of pocket as quids in.
Investors concerned about market valuations can do two things. The first is to diversify globally, so a downturn in one particular market doesn’t disproportionately hit your portfolio.
The second is to set up a regular savings plan so money is drip fed into the market gradually, thereby taking advantage of any dips in prices.
Laith Khalaf is senior analyst at Hargreaves Lansdown
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