Investing tips as bull market becomes longest in history

The bull market in U.S. stocks is about to become the longest in history.

If stocks don’t drop significantly by the close of trading Wednesday, the bull market that began in March 2009 will have lasted nine years, five months and 13 days, a record that few would have predicted when the market struggled to find its footing after a 50% plunge during the financial crisis.

The long rally has added trillions of dollars to household wealth, helping the economy, and stands as a testament to the ability of large U.S. companies to squeeze out profits in tough times and confidence among investors as they shrugged off repeated crises and kept buying.

“There was no manic trading, there was no panic buying or selling,” said Jack Ablin, chief investment officer of Cresset Wealth Advisors. “It’s been pretty steady.”

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The question now is when the rally will end. The Federal Reserve is undoing many of the stimulative measures that supported the market, including keeping interest rates near zero. There are also mounting threats to global trade that have unsettled investors.

In a weekly market insight report, Richardson GMP says the rally likely still has legs. The firm says 20 of 30 indicators, which range from interest rates to sentiment to fundamentals, remain bullish, which is fewer than six months ago but well above warning levels.

Arguably, emerging markets will be the canaries in the coal mine, warning of pending market trouble—especially EMs that are vulnerable to current account deficits and that borrow in non-local currency, says the firm.

Referring to recent currency troubles faced by Turkey, Richardson GMP says that “recent weakness should not be viewed as a buying opportunity in emerging markets,” considering the Fed is tightening faster than other central banks, some of which aren’t tightening at all.

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Also, despite markets having room to run, the firm says it’s time to consider taking a more defensive position within portfolios.

One way to do that is to reduce exposure to companies with higher bear beta scores and to move to companies with lower ones.

Bear beta considers only periods when the overall market declines. A high bear beta implies share price would fall more than the market; a low bear beta, less.

For example, the firm’s analysis finds that, within materials in the Canadian market, diversified mining, chemicals and forestry all have high bear beta scores, while gold is relatively more defensive. In financials, banks are middle of the road, while insurance is higher risk.

In the U.S., healthcare is more defensive compared to Canadian names given the presence of large pharmaceuticals.

For a chart of sectors with higher and lower bear beta scores, see the full Richardson GMP report.

Threats to the rally

The Fed has hiked its benchmark lending rate twice since January, and is expected raise it twice more by the end of the year.

Stocks could suffer as higher interest on bonds convinces investors to start shifting money into this safer alternative. Higher rates also increase costs for business and make expanding operations more difficult.

More worrisome, rising rates can trigger recessions, which often kill bull markets. Three of the past five recessions were preceded by rate hikes by the Federal Reserve.

With stocks richly priced, there isn’t much room for things to go wrong.

The prices investors are paying per share for U.S. companies are 2.2 times revenue per share, near historic peaks. And prices compared to long-term earnings are much higher than in 2007 before the market crashed.

For all its longevity and gains, the final verdict on the U.S. bull market won’t be known until it ends.

The financial crisis of 2008 that ended the last bull market laid bare just how much debt and risk-taking had fueled gains in the previous seven years. The dot-com bust that ended the 90s rally showed how reckless investors had been.

This time many of the unanswered questions concern the Fed’s monetary stimulus.

How much did it help boost stocks and thus the broader economy? Will the gains it helped manufacture prove ephemeral? What are the long-term costs of its unprecedented economic rescue effort as it faces the tricky task of unwinding its stimulus program?

Another question is the wisdom of so many buybacks. Companies have spent trillions in recent years repurchasing their own stock, which has helped lift prices in the short term but does nothing to expand operations, train workers and generally improve their businesses. Many of the purchases were made with borrowed money, adding to already sizable debts.

Money manager James Abate, who urged people to buy early in 2009, says stock prices are too high given the threat to profits from higher borrowing costs as rates climb, higher input costs from Trump’s tariffs and, possibly, bigger raises for workers in the future.

“Profits are peaking and valuations are extreme,” said Abate, chief investment officer of Centre Asset Management.

His prediction is that stocks will plunge by the end of the year and a bear market will begin.

Others are more optimistic.

David Lebovitz, a global market strategist at JP Morgan Asset Management, takes comfort in the fact investors have been skeptical of the rally all along, which he says has allowed none of the excesses of prior bull markets to build up.

“This is a bull market that people love to hate,” he said. “Blind exuberance hasn’t been a characteristic.”

Asked how much longer the rally will last, he said: “At least another year, but two might be a bit of stretch.”

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