NEW YORK (AP) - The current bull market in stocks is a month or so away from
becoming the longest in history. If it happens, then what?
Many along Wall Street expect the rally that began in March 2009 to eclipse
the 1990-2000 run that ended with the dot-com crash. But a growing number of
experts are questioning whether the stock market’s run will keep going
through 2019 and beyond.
The big threat now is the potential for a punishing trade war, as the United
States squabbles with allies and rivals alike on tariffs. That could squeeze
earnings and economic growth around the world.
Beyond that, several firmer warning signals for the market are flashing
yellow. Here’s a look at some of them:
THE YIELD CURVE
This is a somewhat inscrutable signal, hidden in the recesses of the bond
market, but it’s been an accurate one.
When yields for long-term bonds drop lower than yields for short-term bonds,
it’s what economists call an “inverted yield curve.” It indicates that
investors are forecasting a weaker economy and inflation in coming years. An
inverted yield curve has also preceded each recession of the last 60 years,
though sometimes by more than a year.
The yield curve isn’t inverted now, but it’s the closest it’s gotten since
before the Great Recession.
Prices are picking up across the economy, particularly for businesses, after
years of ultralow inflation. Prices for businesses rose 3.4 percent last
month from a year earlier, the biggest jump since 2011.
For companies, higher inflation erodes profits unless they’re able to raise
prices. For consumers, it saps their buying power.
The Federal Reserve has already indicated it may raise interest rates two
more times this year, and an acceleration of inflation would push it to pick
up the pace.
Higher interest rates have historically hurt stocks and other risky
investments. Record-low interest rates helped prop up stock markets for most
of the past decade.
Companies are famously hoarding great piles of cash, but they’re also
sitting on ever-growing piles of debt.
Total debt among non-financial U.S. companies is at a record high, relative
to the size of the U.S. economy. As the Great Recession demonstrated, high
debt levels can leave companies, families and anyone else particularly
vulnerable when an economic shock arrives.
If interest rates do continue to climb, so too do borrowing costs for
Investors are pouring money into stocks of companies that are growing
quickly, such as big technology companies. These growth stocks are trouncing
what are called “value stocks,” which are companies that look cheap or have
Investors have switched allegiance back and forth between growth and value
stocks, and each time, the outperformance has peaked just before or after a
market top for the S&P 500, such as in 2000 and 2007.
M&A AND IPOs
Companies around the world are buying each other as they hunt for growth,
and this year is on pace to be the highest for mergers and acquisitions
since 2007. Companies are also going public in hopes of cashing in on the
hot stock market, and this past quarter was the busiest for IPOs in three
years, according to Renaissance Capital.
Activity for both buyouts and IPOs tends to peak around market tops.
BUT FOR NOW ...
Of course, this bull market has run through all kinds of warning signs and
proven its skeptics wrong time and again. Rising from the ashes of the
financial crisis, it’s famously been one of the most unloved bull markets in
Surging corporate earnings due to lower tax rates and a strengthening
economy should give the market more fuel this year. Plus, one important
ingredient for a market top is still missing - the wave of buying that comes
as investors succumb to the fear of missing out, said Matthew Miskin, market
strategist with John Hancock Investments.
“The yield curve is not inverted yet, and earnings are still good,” Miskin
said. “It’s not there yet, but you want to have a plan of attack for when
all these dominos do fall.”