This Bull Market Makes Boring Beautiful

Pedestrians hasten past the New York Stock Exchange Photograph by Scott Eells/Bloomberg

The Dow nearly at 15,000; the S&P at 1600. U.S. stock indexes are a day’s rally from yet another record close—and another plug on the nightly news. Nobody much cares.

So describes this peculiar bull market: consistently up, consistently making new milestones, but consistently not front and center. Maybe that’s not such a bad thing.

“One of the things which has impressed me about this rally has been how methodical and boring it’s been,” says Jim Paulsen of Wells Capital Management. “It never goes up a lot on any single day but is up a lot, looking back. There is still more attention devoted to a day when the market is off a little bit than there is when it reaches another all-time new high.”

The environment is benign for a bull market in U.S. equities that’s now in its fifth year, having rallied 134 percent from a 12-year low it set in March 2009. Corporate earnings have roared back, and the Federal Reserve has kept interest rates at historically low levels, on top of its three rounds of bond purchases. Compare that to bull markets of yesteryear, in which traders were on edge lest interest rates be hiked. Today, investors are maxing out yield opportunities in the fixed-income market; the average junk bond yield just hit a fresh record low. Equities are largely thought to be the next trade up the risk curve. Starved for yield, bond funds are adding stocks, according to the Wall Street Journal.

Central banks abroad—from Japan to Israel to Switzerland—are buying stocks, lending their giant balance sheets and prestige to the asset class during a period of falling yields on sovereign debt. In relation, the European Central Bank just cut rates for the first time since July. This week the U.S. Fed left unchanged plans to hold its target interest rate near zero, as long as unemployment remains above 6.5 percent and the inflation outlook does not cross 2.5 percent.

Meanwhile, of 340 companies in the S&P 500 index that have so far posted earnings, 73 percent exceeded analysts’ estimates, while 55 percent missed on revenue, according to data compiled by Bloomberg.

In a great post, “Earnings Without Revenue, Bubbles Without Credit Growth,” Zero Hedge calls into question the quality of these profits:

“Since the trough of 2009, S&P 500 operating earnings have risen almost 100 percent from about $65 to almost $115, while revenue has increased about 26 percent from just a little over $910 to a little shy of $1,150 per share, according to the latest chart book from Yardeni Research (PDF). That is a 4:1 ratio between earnings growth and the increase in underlying revenue. Or put another way, in 2009 there was $14 in revenue underneath every dollar in earnings in the S&P 500 vs. about $10 today.”

Paulsen says he is sticking with a contrarian view that has served adherents well for more than four years running: As long as most are unimpressed by the market’s advance and remain persuaded it will yet collapse again, risk is probably low and future upside potential probably good.

Paulsen does warn that he could turn cautious when we in the press begin to celebrate the bull.

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