The bull market has lasted nine years, and investors rightly wonder how much longer it can continue. Economist and longtime market watcher Ed Yardeni is unabashedly bullish, predicting 3,100 on the S&P 500 Index (SPX), or 11.2% above the March 9 close, in an interview with Barron's. "The earnings story is phenomenal. The tax cut has added seven percentage points to earnings growth this year," as he told Barron's. On trade and tariffs, he said that "the president will get a lot of pushback; then the underlying power of earnings will carry the market higher."
Since the low point of the last bear market, reached during intraday trading on March 6, 2009, the S&P 500 has gained 318% through the close on March 9, 2018, while the Dow Jones Industrial Average (DJIA) is up by 292%. However, most analysts, including Yardeni, use closing prices to determine market peaks and troughs. On that basis, the last bear market ended three days later, on March 9, 2009. From that point onwards, the respective gains have been 312% and 287%.
Yardeni sees several driving forces for further stock price gains. Given low inflation, he expects the yield on the 10-Year U.S. Treasury Note to stabilize between 3% and 3.5%, and unlikely to exceed 4%. "I'm expecting inflation will remain low because of the powerful forces of globalization, technological innovation and aging demographics," he adds.
With nominal GDP growth at about 4.4%, he projects S&P 500 earnings to be up by 16.8% in 2018, and by another 7.1% in 2019. His forecast of 3,100 on the S&P 500 is based on anticipated 2019 earnings of $166 valued at a forward P/E ratio of 18.7. That's above his March 9 calculation of 17.3, per his firm's Stock Market Briefing. Nevertheless, skeptics see a variety of reasons for be bearish. Historically high stock valuations are just one of them. (For more, see also: 6 Forces That May Push the Stock Market Even Lower.)
'The One Poll Trump Follows'
On trade, Yardeni told Barron's, "The stock market is the one poll Trump follows. If it continues to decline, it will make him realize that [imposing tariffs] isn't the way to proceed." Yardeni coined the phrase "bond vigilantes" in the 1980s to describe investors who sold bonds, forcing interest rates up, in protest against federal deficit spending, per CNBC. Today, Barron's notes, he talks about "Dow vigilantes" who send a message to Washington by dumping equities.
Nonetheless, he shrugs off the recent "trade-war scare" that sent stocks downward as "panic attack No. 61 since the beginning of the bull market in 2009." Still, he acknowledges that trade wars are not good for economic growth, and recognizes that eventually one of these "panic attacks" will start a genuine bear market. Last week, Daniel Pinto, co-president of JPMorgan Chase & Co. (JPM), warned that stocks may tumble by 40% in the next three years, possibly triggered, in part, by tariffs. (For more, see also: Stock Investors Should Brace for 40% Plunge: JPMorgan.)
'Making Trade Fairer Would Be Positive'
"Assuming Trump succeeds in making trade fairer for Americans without crippling free trade overall, it would be positive for the U.S. and for stocks," Yardeni said. He observed that "Ronald Reagan also came in as a protectionist, and imposed 100% tariffs on Japanese semiconductors and twisted their arms with auto export restraints. It worked: It brought a lot of Japanese production here." Yardeni believes that President Trump is taking "extreme stances" on trade as a negotiating tactic, "then compromises to get more or less what he wants."
More Bullish Signs
Fundamentals remain strong, with strong corporate earnings, growing at the fastest pace since 2011, and unemployment in the U.S. at a 17-year low, against a background of accelerating global economic growth, per The Wall Street Journal. Contrarians are cheered, meanwhile, by relatively "muted" optimism among investors, the Journal adds. Roughly 26% of individuals surveyed last week by the American Association of Individual Investors (AAII) think that stocks will rise in the next six months, well below the long-term average of 39%, and sharply below the 75% who were bullish in January 2000, during the Dotcom Bubble, also per the Journal.
The Bears Respond
Per MarketWatch, highly bearish indicators of excessive stock valuations include price to sales ratios as well as P/E ratios. Most bearish of all, MarketWatch says, is the high ratio of equities to total household financial assets. (For more, see also: Why The 1929 Stock Market Crash Could Happen In 2018.)
Meanwhile, despite regulatory initiatives taken in the years since 2008, a new banking and financial crisis is entirely possible. Sheila Bair, who headed the FDIC during the last crisis, is among those who warn that its lessons have been forgotten or ignored. Worse yet, she sees similar negative forces building today. (For more, see also: 4 Early Warning Signs of the Next Financial Crisis.)
For their part, Investopedia's millions of readers worldwide are very concerned about the securities markets, as measured by the Investopedia Anxiety Index (IAI). Nonetheless, their level of worry has abated in recent weeks.