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We all know we’re in a bull market right now, with the S&P 500 (SPY) hitting new all-time highs this week. However, it is wise to carefully consider what could trigger a bear market. That’s why Steve Reitmeister shares his insights into his two main causes of bear markets. And how much of a concern is that for investors at this point? Read below for more information.
A market that refuses to fall will inevitably rise.
And that simple logic is exactly what’s happening at this stage. Investors just don’t want to lose control of the stock market, even if the Fed’s interest rate cuts start further down the line.
This is the S&P 500 (spyIt hit another all-time high on Thursday, even as Fed officials have been vocal about the dangers of cutting rates too soon. We should assume that this positive price trend will hold until dramatically negative factors emerge.
So the question arises…What’s derailing this bull market?
That will be the focus of today’s discussion.
Market commentary
One of my favorite investment sayings is:
“It’s a bull market until proven otherwise.”
So the stock market’s natural pull is to go up. This helps explain why the average bull market lasts 63 months, while the average bear market only lasts 13 months. That’s a 5-to-1 advantage over being in a bull market.
To put it another way…creating a bear market is harder than many people think. So it really takes some special events to swing the stock off its bullish axis.
Ultimately, there are really only two factors that create a bear market. Let’s take a look at both below.
First and most obvious is the idea that a recession is forming. This lowers earnings prospects, reduces risk-taking, and lowers each stock’s P/E ratio. This combination results in an average S&P 500 bear market decline of 34%.
The second reason stems from the bursting of stock market bubbles (often followed by recessions with the loss of all household net worth). Two obvious examples are the technology bubbles of 1929 and 2000.
Sure, some might point to the Great Recession of 2008. But that was due to a real estate stock bubble that led to bank failures. That’s certainly an interesting situation…but it’s not the same as stock prices being too high and eventually falling.
On the recession front, the economy continues to move at a healthy pace, with GDP Now estimates of +2.5% growth in the first quarter. This is very close to the long-term average of +2.7% and does not signal a recession forming.
To be sure, there’s always the fear that the Fed will be too welcoming of high interest rates, leading to future recessions. The concern stems from the fact that 12 of the past 15 rate hike cycles ended in recession. But Mr. Powell and his allies are good students of history and appear to be trying to manage a soft landing that would allow them to cut rates before a recession begins.
I recently learned that the market’s current P/E (20.7) is in the top 5% of stocks in history. That way we can stop in their tracks and consider whether we are overvalued.
The counterargument to this is that investors now have a better understanding of the stock market and the risks and rewards of bonds and cash. This has driven up his P/E on stocks over the past 20-30 years, making long-term historical standards a bit outdated.
As a rebuttal, I would like to share a PEG ratio graph from 30 years ago.
The PEG ratio is my favorite valuation metric because it tells you how much you’re willing to pay for each unit of increased earnings. That means his P/E ratio for a tech stock growing 20% a year should be higher than for a quiet utility company with only 3% earnings growth.
As you can see, the market’s current PEG level is moderate over the past 30 years, and is not something that should cause concern from a valuation standpoint.
However, there is definitely a group that is slightly overvalued, such as the Magnificent 7 stocks and some “hip” AI companies. Interestingly, Tesla is finally coming down from its lofty heights, with its stock already down 40% from its high. I’m hoping some of the profit taking will roll into these other stocks, and that money will flow to other valuable companies with more attractive valuations.
Back to the top, it’s a bull market until proven otherwise. And we’ve just looked at things that can derail the market (recession and valuations), so we’re in a pretty safe position on that front as well.
Therefore, I will continue to invest in stocks with all my might. However, given that some overripe stocks could fall, focus more on value for now.
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What’s next?
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This is all based on my 43 years of investing experience, having seen bull markets, bear markets, and everything in between.
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I wish you success in your investments.
Steve Reitmeister…but everyone calls me Leity (pronounced “righty”)
StockNews.com CEO, and Editor, Reitmeister Total Return
SPY stock was trading at $514.66 per share Friday morning, down $0.15 (-0.03%). Year-to-date, SPY has increased 8.28%, compared to the benchmark S&P 500 index’s increase of % during the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews readers as “Reity.” He is not only the CEO of the company, but also talks about his 40 years of investment experience in the world. Reitmeister Total Return Portfolio. Learn more about Reity’s career and find links to his latest articles and stock picks.
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