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Reviving the Tired Bull

By Joseph Lisanti It's been a little more than three years since the S&P 500's worst bear market in a generation bottomed on October 9, 2002. By modern stock market standards, the bull move that started the next day is getting a bit old.

Since 1942, the average bull market (defined as an advance of at least 20% from the low in the previous bear market) has lasted 56 months, according to Sam Stovall, Standard & Poor's chief investment strategist. But averages can conceal a wide range of outcomes: The length of bull markets has ranged from 26 months to 113 months.

Of the 10 bulls that preceded the current one, six lasted at least four years. Those long-lasting bulls posted an average gain of 14% in their fourth year. We don't yet know if this bull ended with a peak in early August, or if it is, in fact, charging into its fourth year.

Whatever the case, we believe that stocks are facing headwinds, including higher energy prices and interest rates. Even though energy prices have eased a bit, government estimates are that natural gas heating bills will surge 48% this winter, while oil heat will cost 32% more. And that's with a forecast of a fairly mild winter.

High energy costs and word that August saw the biggest increase in prices paid for imported goods in 15 years will add to pressure on the Fed to keep inflation in line. Even though the core CPI (excluding food and energy) rose only 0.1% in September, we expect no pause in the upward march of the fed funds rate, which we see at 4.5% as Alan Greenspan's term as chairman ends in January.

At the start of the current earnings season, our analysts were expecting a 15% year-over-year gain in third-quarter operating profits for the S&P 500. That's close to the 17% gain posted in the same period of 2004.

A better showing might be enough to breath life into this bull. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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