Birinyi Says Six-Year Bull Won’t End Until Skeptics MuzzledLu Wang
The U.S. stock rally that turns six years old today isn’t about to die just because people say it is. In fact, their pessimism is driving it higher.
So says Laszlo Birinyi, the 71-year-old investor who has predicted gains at every turn as the Standard & Poor’s 500 Index tripled after bottoming at 676.53 on March 9, 2009. Warnings that stocks are in a bubble and that breadth is narrowing are signs that the thing that really kills bull markets, euphoria, has yet to surface, he says.
Birinyi, the president of Birinyi Associates Inc. in Westport, Connecticut, said in a phone interview that the S&P 500 will climb to 2,240 over the next three to six months. Investing $10,000 when he forecast gains at the end of 2008 would be good for $25,400 now.
“We still see continuous negativity,” Birinyi said. “A lot of people have missed and they’ve been wrong. It’s hard to one day turn around and say ‘I was wrong.’ Ultimately, the market continues to surprise on the upside.”
More than 50 record closes for the S&P 500 in the last year failed to convince investors to stick with equities. They’ve pulled $16.9 billion from exchange-traded funds tracking American shares in 2015 and sent $16.2 billion to bonds, according to data compiled by Bloomberg. That’s the biggest divergence ever in quarterly data going back to 2000.
Bolstered by Federal Reserve stimulus and a doubling in corporate profits, the S&P 500 has more than tripled since 2009. At 18.6 times earnings, the index’s valuation is near a five-year high and compares with an average of 16.9 since 1936, data compiled by Bloomberg and S&P Dow Jones Indices show.
The current run, lasting almost 2,200 days, is about two months away from overtaking the 1974-1980 bull market as the third-longest since 1929. At the same time, stocks posted one of the biggest losses of the year on Friday, with the S&P 500 dropping 1.4 percent. The index climbed 0.4 percent to 2,079.43 at 4 p.m. in New York and is down about 2 percent from its all-time high of 2,117.39 reached March 2.
Robert Shiller, a professor at Yale University, said in a Feb. 24 Bloomberg Radio interview that it’s time to “tilt away” from U.S. stocks because they’re expensive.
His cyclically adjusted price-earnings ratio, based on the average inflation-adjusted profits from the previous 10 years and also known as CAPE, was 27.9 last month, or about 68 percent higher than the average since 1881. The ratio has exceeded the average, 16.6, for all but nine months since 1991.
Birinyi criticized CAPE in a March report, saying that the ratio “has the tendency to overstate” stock valuations and has become “the favorite fundamental argument of the bearish community.”
Shiller didn’t respond to a phone call and an e-mail seeking comment.
Leuthold Group LLC, one of the earliest bulls in 2009, has turned skeptical. Doug Ramsey, the chief investment officer, said in January that the number of shares participating in the advance was shrinking and stocks had begun a topping process, with the market heading for a 25 percent to 30 percent drop either this year or next.
After the S&P 500, Dow Jones Industrial Average and Russell 2000 Index all hit records on March 2, and the Nasdaq Composite Index climbed above 5,000 for the first time since 2000, Ramsey also said an imminent market top is “statistically unlikely.”
“This market has had a remarkable ability to rejuvenate itself at every moment it’s begun to look ragged,” Ramsey said in a monthly report released Friday. “But the stock market will always serve up something to worry about, and -- based on the bull market’s age, the Fed’s less accommodative stance, and prevailing valuations -- we’re still inclined to view new divergences within the lens of a developing market top.”
To Birinyi, doubts prolong equity gains. Investors calling for peaking prices based on market breadth, valuations or the Fed are missing the strength that stocks such as Whirlpool Corp. and Sherwin-Williams Co. are exhibiting, he said in the interview.
“If there were some significant, bad news on the interest rate front, if there were really a significant decline in housing, Sherwin-Williams and Whirlpool should not be at all-time highs,” Birinyi said. As for valuations, “I can never be able to find some sort of number that says the relationship between S&P’s earnings and S&P’s price should be X. It’s a very random number,” he said.
Whirlpool, a home-appliance maker, and paint retailer Sherwin-Williams both rose to records on March 2.
Birinyi has defied market pessimists throughout the six-year bull market, writing in December 2008 that stocks bottomed. In September 2011, he said U.S. companies were earning too much to be dragged lower by Greece’s debt crisis. The index bottomed the next month and then climbed 14 percent through the end of the year.
Still, the ensuing momentum in stocks caught Birinyi by surprise. In October 2013, he raised his three-month forecast for the S&P 500 to 1,820 after setting a year-end target of 1,740 two month earlier. The index finished the year at 1,848.36, completing the best annual gain since 1997.
His January 2011 estimate for the S&P 500 to hit 2,854 by September 2013 never came true. That projection was based on the average size of some advances in the past.
“There is no such thing as an average, typical or usual bull market,” Birinyi said in last week’s interview. “We realized the market has a three- to six-month time horizon. If you forecast a year, you’re saying you see further than the market. So what we do is we forecast for three to six months and then we’ll stop and reassess it.”
Volatility is rising amid concern over global economic growth and the timing of the Fed’s first raise in interest rates since 2006. The S&P 500 fell 1.6 percent last week for the worst decline since January, as better-than-forecast jobs data fueled speculation the central bank is moving closer to raising rates.
The index jumped 5.5 percent in February, rebounding from the worst month in a year with the biggest gain since October 2011.
Birinyi plans to trade more to navigate ups and downs in stocks. His firm recently bought BP Prudhoe Bay Royalty Trust after the shares slumped 11 percent on Feb. 26.
“Our view has been for a long time that this is not going to be a pop-up bull market,” Birinyi said.