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Is the longest bull market in US history set to continue?

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Written by: Adrian Lowcock
29/08/2018
Last week the S&P 500 posted a modest gain marking the longest bull market in US history. This bull market started on 9 March 2009 after markets finally stabilised following the global financial crisis.

Since then the S&P 500 has gone from strength to strength rising 323% and the returns for UK investors with any dividends reinvested were an even more impressive 418%.

Like previous bull runs the market was supported by a recovery in the US economy and growth in company earnings. The latter is the most important driver of share price growth. Growing earnings means the price earnings ratio (P/E ratio) of companies can fall or stay the same at even higher share prices.

In addition this bull market has had some unique drivers. Firstly the US Federal Reserve has been very accommodating with low interest rates and quantitative easing supporting businesses and investment into the stock market. At the same time companies have been buying back more of their own shares as companies have been awash with cash. Share buybacks shrink the number of shares in issue helping to boost stock prices as the earnings per share will rise as earnings are spread across fewer shares. Due to low interest rates, companies have had a lot of cash to be able to buy back their own shares.

Just as the US economy was becoming self-sustaining, President Donald Trump announced a $1.5trn tax cut package giving a boost to corporate earnings and share buybacks this year, helping the bull market to become the longest in history.

What next for investors?

There are plenty of positives to support the US stock market. The US and global economy are growing at a healthy rate. Governments and central banks have switched from emergency monetary stimulus to investment, or fiscal stimulus, to support further growth.

Corporate earnings, boosted by a healthy economy and tax cuts in the US continue to grow and have helped valuations come off their highs even though the markets haven’t fallen. In addition US equities look attractive to investors concerned about riskier markets and for those looking to avoid government bonds which fall in price as interest rates rise.

But there are always risks to the global economy and given the length and extent of the market rally in the US, it is prudent to believe we are nearing the end of the bull-run. Trump’s tax policies have given a one-off boost to corporate earnings but the effects could be temporary.  The reversal of quantitative easing is accelerating and could cause a slowdown in the US economy.

And there are the actions of Donald Trump. Could he be impeached or be free to continue his protectionist policies and escalate the trade war? A trade war poses a significant risk to the outlook, not least because it could do serious damage to corporate profits.

The future is not certain (it never is) and investors should always remember that past performance is not a guide to future performance, valuations are important and market sell-offs are usually unanticipated. As ever, diversification is the best way to protect your wealth.

Adrian Lowcock is head of personal investing at Willis Owen

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