With all the recent market volatility, it’s natural to wonder if the bull market that we’ve been enjoying has come to an end. CNN/Money recently looked at this exact issue in light of five signs of an impending bear market.
Before a bear: Oil prices often surge
Happened yet? Yes
It happened in the early- to mid-1970s and again the early 1990s. And guess what? It’s happening now.
Before a bear: Treasury yields often run up
Happened yet? Not really
It happened in the mid-1970, early- and late-1980s, early 1990s, and also in 2000. So far history has’t repeated itself.
Before a bear: The number of rising stocks starts to shrink
Happened yet? Has it ever!
If more stocks on the NYSE are hitting 52-week lows than are hitting 52-week highs, that’s a bad sign. As of mid-July, twice as many stocks were hitting highs as were hitting lows. But by the end of July, the situation had reversed itself and new lows vastly outnumbered new highs.
Before a bear: Consumer spending sometimes slows
Happened yet? Starting
Retail sales fell nearly 1% in June, and if housing prices continue to drop, consumer is expected to drop as well.
Before a bear: Corporate earnings growth often slows
Happened yet? Just wait for the ’07 numbers
During the bull market leading up to the 2000 nosedive, earnings of the average S&P 500 company grew more than 12%/year. But when companies started warning of slower profit growth, the market started to slide. Fast forward to the present. From 2003 to 2006, earning rose more than 17% on average. However, the consensus estimate for 2007 is that earnings growth will be less than half that, at 7%.
So where does this leave us? It’s hard to say, but I’m not particularly concerned. We’re in this for the long haul, so even if we are headed for a correction (actually, we’re almost there) or a full-out bear market, we’re planning on staying the course.
One thing to keep in mind is that stocks are much more reasonably priced than they were in 2000, when the average S&P 500 company had a P/E ratio in the neighborhood of 30. In contrast, the average P/E ratio dipped this past week to 15.8, which is the lowest level since January of 1991. Given this, it’s hard to argue that stocks are wildly overpriced.