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Banking THE ECONOMIST: Long live the bull

THE ECONOMIST: Long live the bull

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The current bull market in U.S. stocks is now the longest on record (according to most people). Unless the economy derails (which is unlikely for the foreseeable future), the bull has room to run, even after nearly 3,500 days on the move.

There is not a precise definition of “bull market,” though most people agree that it’s a time of generally rising stock prices, strong economic growth and high investor confidence. A 20 percent correction would signal the end of a bull’s run, according to most analysts, but others argue that it’s not that simple. In the midst of the headlines celebrating the market’s recent milestone, there were also some arguing that this is not, in fact, the longest bull market and that the period from late 1987 through early 2000 should hold that honor in spite of the notable correction in 1990.

Regardless of whether the current bull run is the longest or second longest, it’s impressive. The tide turned for the market in March 2009 during the depths of the Great Recession, when the Dow Jones Industrial Average had fallen from over 14,000 to 6,600 in only about 18 months. Since then, the Dow and the S&P 500 have quadrupled.

One reason for success is that it’s been a slow and steady rise. Some previous bulls have been taken down by markets becoming overheated and then coming back to reality with a major correction, such as the dotcom bubble of the late 1990s that ended with a market tumble in the early 2000s. This time, there have been some difficulties and negative views keeping the market’s rise from becoming unsustainable.

Generally speaking, bull markets tend to slightly lead the economic cycle, with upward movement beginning somewhat before the economy enters an expansionary phase. When the economic cycle turns back toward recession, the stock market tends to follow and the bull market ends. Equity prices are, at the most basic level, driven by the ability of firms to make money (more technically, expected future cash to investors adjusted for risk), and an expanding economy is a crucial factor in most companies’s sales and earnings.

Currently, the U.S. economy is at essentially full employment. Consumer confidence is high, and output growth is strong. There are certainly issues with the potential to turn things around (such as international trade disputes, inflation, concern over spiraling deficits, workforce shortages or the Federal Reserve’s ongoing normalization of monetary policy), but at this point I think we’ll see continuing growth for the foreseeable future. As long as the economy continues to expand, the bull will likely keep running. Long live the bull!

M. Ray Perryman is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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