What will kill this bull run?

Katherine Denham
French Bull Jumpers perform at the Liga de Corte Puro final in Valladolid
It’s the decisions we make now which will determine how we fare when the bull run ends (Source: Getty)

Stock markets have been rising for nearly nine years now.

It might not be the longest bull run in history, but it’s certainly getting on a bit – and we all know that nothing lasts forever. So should investors be worried?

Over the past few years, the US stock market has generally taken everything in its stride. Despite multiple political surprises, central bank policy moves, sovereign debt crises, and terror attacks, the market has only seen short term corrections, says Darius McDermott, managing director of FundCalibre.

Looking back over the past 90 years, the average bull run for the S&P 500 lasted 8.9 months, with a cumulative total return of 468 per cent. The current bull market has lasted roughly 8.5 years and returned 320 per cent.

Drawing parallels

McDermott says the bull run between 1987 and 2000 – which saw the S&P 500 jump by a whopping 816 per cent – serves as a reminder of what is possible if the good times continue.

There are clear similarities between the current state of the market and the tech boom of 2000. Like that era, the market is being driven by tech companies, such as Amazon and Apple. And McDermott points out that while the broader market has returned 13 per cent this year, the S&P 500 tech sector has returned more than 26 per cent.

Meanwhile, US stock valuations are at their second highest point in history – beaten only by the peak before the dotcom bust of 2001. That crash was widely thought to be caused by too much money piling into tech firms too soon, but what could bring this bull market to an end?

The old adage

In a recent report from Royal London Asset Management, fund manager Trevor Greetham says bull markets don’t die of old age – meaning the rally has to be killed off in one way or another. While excessive growth, valuation, or leverage usually signal the end of a bull market, Greetham argues that none of these factors have yet reached such extreme levels that it could indicate the approach of a bear market.

“The world economy is picking up, but wage inflation remains surprisingly muted, despite low unemployment rates,” he says. “With interest rates below the rate of inflation, it’s not surprising that money continues to flow into markets.”

It does seem as though we are stuck mid cycle, waiting for the next bear run with bated breath. And Greetham admits that at some point a sustained rise in inflation will trigger a concerted effort by central banks to tighten up monetary policy.

What goes up must come down

Today’s bull market has largely been driven by extraordinary monetary policy measures, such as record low interest rates.

But in the same way that monetary policy has driven markets up, it could also bring them down, McDermott warns, adding: “central banks are walking the tightrope as they unravel current measures, creating the potential for policy errors.”

So if interest rates were to rise too sharply, for example, this would put consumers under pressure, which McDermott warns would increase the likelihood of a recession, therefore spelling the end of the bull market.

But while US policymakers have been hiking interest rates, they have little reason to become aggressive, making it unlikely that interest rates will end the bull market just yet.

Actions from central banks are usually the tipping point for markets, but other factors beyond human control should also give cause for concern.

For example, disasters such as hurricanes could have economic repercussions later down the line, causing retail sales to stall, and gas and oil prices to spike as refineries are shut down. Meanwhile, a housing shortage could push up rents – creating the potential for an uptick in inflation.

“Over the longer term, the rebuilding effort could have a material impact on infrastructure spend, employment, and the gap between the rich and poor,” says McDermott, pointing out that most homeowners will be forced to bear the brunt of the costs.

Is it time to prepare for the worst? McDermott doubts the bull market will stall just yet, but warns investors to tread carefully – because what goes up must eventually come down.

“If the US bull market ends, the UK will likely follow suit. So if you are feeling nervous about how far markets have risen already, it could make sense to back a fund which has the potential to participate to some degree in rising markets, but can also provide some protection when markets fall.”

He recommends funds like the Lazard US Equity Concentrated, Schroder US Mid Cap, Henderson UK Absolute Return, and SVS Church House Tenax Absolute Return.

Long distance runner

The bull run could still have some distance to go, particularly as monetary policy remains accommodating.

But it’s important not to get over exuberant and be blinded by the euphoria when making stock market decisions. After all, it’s the decisions we make now which will determine how we fare when the markets eventually turn.

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