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The stock market on Wednesday logged another historic first, reaching the record milestone of the nation's longest run as a bull market.
Robust corporate earnings, a booming economy, and a tax code overhaul continue to fuel the market’s upward trajectory after the financial doldrums that followed the Great Recession, and all this despite an escalating global trade war over tariffs and investor uncertainty as President Donald Trump distances himself from close aides facing a panoply of criminal charges.
Wednesday marked 3,453 days since the S&P 500 hit its trough on March 9, 2009. It will be the longest period in which the index, which measures America's largest 500 public companies, has gone without a fall of 20 percent or more. By market close on Wednesday, the index will have risen almost 325 percent since its low point in 2009.
Like the Dow Jones Industrial Average hitting 25,000 for the first time earlier this year, the symbolic milestone has been sustained by a confluence of economic policies and events.
“The markets, in the long run, really are based on two things — expectations of future interest rates and expectations of future earnings growth. Both are very positive right now,” said Dan North, chief economist at Euler Hermes North America.
Economists say the duration of the economic expansion is correlated to the types of companies that have propelled the market higher, and what that telegraphs to investors about the prospect of future growth.
“A lot of this bull market has been driven by technology stocks,” North said. “They have accounted for a significant amount of the gains, especially the past few years — and that is typical. Tech is typically where you see some of the strongest growth and that’s where America competes very well,” he said, due to the sector’s reputation for invention and innovation.
Technology shares the limelight with a few other industries. “Consumer discretionary has massively outperformed the S&P 500 by far, followed by technology and then financials after that. If you look at these types of things that have driven the overall economy, it makes sense,” said Scott Wren, senior global equity strategist for the Wells Fargo Investment Institute.
Ironically, Wren said the recovery’s slow start may have extended the lifespan of this run. “In this particular cycle, it’s taken so long to play out over such a long period of time that things like the consumer discretionary sector have been able to hang on,” he said.
Economists also point towards Washington as a driver of the market run-up. Euler Hermes’ North said a combination of strong earnings growth and a tax-cutting, deregulating administration in Washington is fueling the continued confidence of investors and corporate leaders.
“Clearly, the level of fiscal stimulus from both the tax reforms and the size of the budget deficit are adding fuel to the economy,” said Tony Roth, chief investment officer at Wilmington Trust Investment Advisers. “We’ve never seen a budget deficit like that outside of a recessionary period in the post-war era,” he said. “The budget deficit and the tax reform have had very upward impact on the economy.”
This shot in the arm could come at a cost, though; economists warn that such short-term stimulative effects are unlikely to be sustainable over the long haul, as the U.S. Treasury faces the prospect of servicing an ever-escalating debt load with rising interest rates.
“Of course there’s a long-term risk. It creates instability in the economy, given the ability of the country to bear that much debt,” Roth said.
Interest rates are a concern more broadly, said Mitchell Goldberg, president of ClientFirst Strategy. “Interest rates are the most important determinant in securities valuation and market valuation,” he said. The Federal Reserve has to pull off a delicate balance, and a misstep could lead to a major economic stumble.
“The greatest risk is that long-term interest rates get out of hand and we see a rapid ascent in the 10-year [Treasury bond] to 4.5 or 5 percent," Goldberg said. "That changes everything and it doesn’t matter how good corporate earnings are, it doesn’t matter at that point how high GDP is, because it changes how stocks are valued, it compresses price-to-earnings ratios and it makes dividends less compelling. It’s a real needle to thread.”
Rising interest rates don’t just make investors nervous. They make it harder for Americans to fund the kind of debt-driven purchases that tend to spur other categories of consumer spending.
Dwight Johnston, chief economist at the California Credit Union League, said there are signs that the type of consumer spending that led the recovery — homes and vehicles — may have reached a peak. “Those two recoveries were a big part of it,” he said. “That started helping confidence on the part of businesses and individuals that maybe the worst was over.”
Ultimately, a crisis of confidence might be what endangers the life of this aging bull, Johnston warned. “Auto sales have plateaued, and look at the housing market — it’s plateaued,” he said. “If they don’t keep generating higher and higher levels of growth, people get worried.”