Are We Headed Toward a Bull or Bear Market?

By Tim Lemke on 15 May 2017 0 comments

The stock market has been on a roll over the last year. Since the winter of 2016, investors have enjoyed a delightful bull market that has seen the S&P 500 index rise by more than 25 percent.

Whenever there is a lengthy run-up like this, investors always want to know how long it can last. Are we due for a big correction or even a record-breaking crash? Or will we see the markets continue to rise?

Trying to time the market's movement is a fool's game, but it's always smart to look at the various indicators that may foreshadow future performance. With the current market, there is evidence to back up both bullish and bearish predictions.

Indicators of a bull market

The good times won't end anytime soon.

Most economic indicators are strong

For the most part, the American economy is stable. Unemployment is at its lowest point in a decade. Inflation is not out of hand. Manufacturing output is up, along with consumer confidence. There are some concerns about overall growth and productivity, but nothing that spells immediate doom for American investors at this point. Generally speaking, if the underlying foundations of the economy are sound, a sudden drop in stock prices is unlikely.

Interest rates are still historically low

We've seen interest rates creep up a bit, but they are still very low by historical standards. If you're placing money in a bank account, don't expect to receive much in the way of income. Bond yields are also very low. Thus, there's a good chance we'll see people continue to invest in stocks, as they have recently offered much better returns than most other options. As long as interest rates remain low, demand for stocks will be high.

Technical analysis supports it

Many analysts and financial planners prefer to examine a technical analysis of the stock market's performance, which looks at long-term trends that have historically repeated themselves. Most observers of these trends believe we are halfway through a growth cycle that began around 2010 and will continue another five to 10 years.

Corporate earnings are good

The stock market has been known to take a dive when stock prices are high, based on the underlying earnings of companies. In other words, when stocks are overvalued, the market will eventually find out, and you'll see a big correction. Recent earnings reports suggest that the stock market growth is justified. Earnings reports for the first quarter of 2017 look to be among the best in more than five years, so there's no indication that stocks are generally overvalued as a whole.

Lawmakers are pushing pro-business policies

President Trump was elected in part because of promises to lower corporate taxes and reduce business regulations, and he has the majority support of Congress. These are policies that are generally favored by the business community, and investors have responded positively. As long as businesses remain optimistic about policy changes, the stock market will be propped up.

Indicators of a bear market

On the other hand, maybe the good times are about to end.

Companies are heavily leveraged

U.S. companies have more debt than ever, and a lot of it comes due in the next few years. Moody's Investors Services estimated that a record $2 trillion corporate debt will come due between now and 2021, and warned that the market's ability to absorb all of these maturities is "below average." Few analysts are predicting a massive wave of corporate bankruptcies, but an inability to refinance debt could curb corporate profits and cause stock prices to fall.

There's a possible epidemic of auto loan defaults

When the stock market last suffered a big crash in 2008, it was largely due to a flurry of defaults on mortgage loans. Many Americans obtained home loans that they ultimately could not afford, and ended up in foreclosure when home values dropped.

These days, it appears that there may be a similar concern facing the quantity and quality of auto loans. It may not be as big a crisis as the housing bubble, but Americans ended 2016 with a record $1.2 trillion in auto loan debt, an increase of 9 percent from the previous year. Nearly one-fourth of these outstanding auto loans are considered subprime, and the delinquency rate from these loans is at its highest in seven years. This doesn't pose the same systemic risk as the mortgage crisis, but the auto industry is a key part of the American economy.

Europe is facing uncertainty

The United Kingdom is in the process of leaving the EU. There are rumors that other countries (France?) may follow suit. There are lingering concerns over terror attacks in the region. On one hand, economic trouble in the EU may benefit U.S. companies, but many American firms operate in Europe and are impacted by geopolitical uncertainty anywhere.

Political concerns

President Trump and members of Congress have been pushing pro-business policies, but eventually, they will have to deliver the goods. Their struggles in passing a repeal of the Affordable Care Act has been viewed as a sign that they may not have the wherewithal to accomplish big things, such as tax reform. A failure to follow through on any of these major promises could eventually cause a pullback in the markets.

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