Market Extra: The stock market is about to make history

Market Extra: The stock market is about to make history

A heroic run?

Barring a breathtaking plunge, the bull market in U.S. stocks on Aug. 22 will become the longest in history, and optimistic investors argue it has miles to go before it rests.

The bull market has thrived amid a decade of financial and political upheaval, thanks in part to the all-you-can eat liquidity feast hosted by the Federal Reserve and other major central banks. Now the Fed has shifted to a tighter monetary policy regime even as the same risks that have dogged this market over the years, including elevated valuations, persist, prompting some pundits to predict an imminent demise of the bull.

But strategists led by John Lynch at LPL Financial argued that the U.S. market still has plenty of upside.

“From tariffs to trade wars to inflation to a flattening yield curve to a global economic slowdown, the headlines continue to cast doubt on the sustainability of this economic cycle and bull market. Although we see several potential stumbling blocks, we continue to believe this economy and stock market rally have plenty of fuel left in the tank,” said Lynch, in a note.

The underlying strength in the market on the back of government spending, robust earnings, and improving confidence is expected to carry stocks higher for at least another year, if not longer, he said.

One core reason for Lynch’s upbeat outlook is that he does not see the same types of excesses prevalent at previous market peaks, including obvious signs of recession.

“There are several reasons we don’t expect a recession soon. One is that the past three recessions were preceded by annual wage growth of more than 4%. Recent data showed wages growing at 2.7% year over year, suggesting inflation remains tame,” he said.

The strategist also stressed that the Conference Board’s Leading Economic Index, which has turned negative ahead of every recession dating back to the 1970s, has risen an “impressive” 5.8% year-over-year recently.

“While this bull market and economic recovery may very well be old, adding it all up, we see few signs that suggest an end is near,” said Lynch.

Since March 9, 2009, which marked the low of the crisis and which many consider the birth date of the current bull market, the S&P 500 SPX, +0.73%  has advanced 320%, the Dow Jones Industrial Average DJIA, +0.56%  has risen 286% and the Nasdaq COMP, +0.70% has soared 521%.

However, not everyone agrees that the bull market began in March 2009, with some arguing that it is best measured as beginning in March 2013 when the S&P 500 took out its precrisis closing high and others contending the current run began as recently as February 2016. A bear market begins when prices falls 20% from the bull market high.

Read: Investors debate the birth date of the current bull market

Meanwhile, 2018 may be the year when popular investing mantras, most notably “sell in May and go away,” are turned on their heads. So far 2018 has defied convention with the S&P 500 climbing almost 7% since the beginning of May.

To be sure, a near term stock market retreat may not be completely out of the picture given the typical seasonal weakness in August and September but investors should view these dips as good opportunities to buy, he said.

“The S&P 500 closed in the green in April, May, June, and July of this year, something that has happened in only 10 other years since 1950. In each of those years, stocks closed higher over the final five months of the year every time,” he said.

Lynch’s sunny outlook fits with similarly bullish projections from other Wall Street strategists such as Stephen Suttmeier, technical research analyst at Bank of America Merrill Lynch, who believes the S&P 500 could test 3,000 as early as 2019 given the market’s similarity to the bull market of the 1950s when interest rates started to rise from their lows.

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