Reassuring Signals That Nine-Year-Old Bull Market Still Has Legs

The yield curve, the Institute for Supply Management (ISM) Manufacturing Index, and stock valuations are among the leading indicators we look at to determine if the bull market is coming to an end. Historically, bull markets have ended when the Federal Reserve (Fed) has pushed short-term interest rates above long-term rates, which is referred to as inverting the yield curve. Chief Investment Strategist John Lynch noted, “The yield curve inversion usually takes place about 12 months before the start of the recession, but lead times vary. With the 3-month Treasury and 10-year Treasury currently yielding 1.67% and 2.89%, respectively, this signal may not be worrisome for quite some time.”

The ISM Manufacturing Index is signaling solid manufacturing activity and robust earnings growth ahead with no sign yet of a meaningful peak. The latest reading of 60.8, for February, was the highest since 2004 and significantly above 50, which indicates contraction.

Finally, though stock valuations have not historically been effective tools for predicting recessions, price-to-earnings (PE) ratios have been high historically when bull markets have ended, as they are now. While high valuations suggest the stock market may be more vulnerable to deterioration in the economic cycle, keep in mind that valuations could possibly come down as earnings ramp up. In addition, PE ratios do not look as threatening when considering still-low inflation and interest rates.

Broadly, these indicators give us confidence that we may be celebrating the tenth birthday of this bull market one year from now. We take a deeper look at these indicators in this week’s Weekly Market Commentary, due out later today.


The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The Institute for Supply Management (ISM) Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

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