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Market Commentary: Is the Bull Run Done?

With so many media warnings, does this mean that the end of the bull market is here?

Written by: Benjamin Bimson CIMA® / BCJ Financial Group

Are we doomed to imminent economic destruction?

Those good old pundits like to hammer home the relatively high P/E stock ratios, and they’re not entirely incorrect, but that’s not the only thing that the market had in terms of data – and I might have to bite on their story line.

Their story needs quite a bit more data behind it – which is what I am here for. Ned Davis put together a chart of various readings which gives a good idea of how much more we need to be looking at before we start screaming headlines.


Chart Source: Ned Davis Research (1)


Stock valuations is not as simple as one metric, and P/E ratios are hugely important, but they are not the whole story.

I will agree, more than half of the metrics and arguably some of the most telling are extremely overvalued. However, we need to learn a few things from history. The ‘90s showed us that extreme valuations can lead to increasingly higher prices, where eventually, we will have a recession – we always have, but I believe that calling for a recession “any day now,” without giving more evidence than anecdotal relative valuations, is just plain irresponsible and fear mongering.

A more balanced approach is to examine exactly why valuations are extremely high and why that is the case. I think comparing current times to the ‘90s is a reasonable way to begin evaluations and here’s why: The following is a table that has data from 1995, 1999 and today.


Chart Source: Ned Davis Research (2)


  • The last 5 years of the ‘90s economic growth was much higher than today, but unemployment and inflation was similar.
  • Labor costs were close to what they are today, however the unemployment gap and labor costs were also tighter than we have today.
  • Overall financial conditions were not as good back then, and interest rates (treasury yields and Fed Funds rates) were much higher than we have today.
  • Yield curves were flat compared to current times.
  • A similarity: Stock prices were skyrocketing and making new highs continually, like today!

The ‘90s saw a technology revolution that has reshaped our economy and world. Ask any teenager today and they could not imagine a world without text messages, Instagram or Snapchat. Today we are going through another technological revolution. Big data, robotics and artificial intelligence are having a huge impact and will change things forever both on and off the financial grid. For example, how many Tesla’s did you see on your way to work today? How many of your neighbors either have solar power or are seriously considering it?

The point of all this is that there are reasons why further gains are possible. Before I get accused of being completely perma-bull (someone who only says things are good), I want to share with you another chart that brings some sobriety.

Expected earnings of companies in the S&P 500 correlates to how much they can be expected to grow on average, over time. We can’t tell exactly when trouble will strike, but we can watch closely for early indicators. They are very sensitive, look at the short term, and are positive right now. However, the big “but” is this: high relative valuations often lead to lower 10 year average returns after hitting extremes.


Chart Source: (4)


This chart is a bit messy but essentially is projecting average returns forward for many asset classes. In short, average returns are expected to average lower.

Why? It is expected that volatility will increase.

The chart below may be a bit easier to interpret, as it is just for the S&P 500. It looks at what is typically the 10-year average return based upon 5 quintiles of current valuation. Notice that the range of returns is what grows, not that the top end is dramatically different!


Chart Source: Ned Davis Research (3)


What’s the takeaway?

Increased volatility drops the effective expected annual returns. The extremes on the downside is what we have designed for our tactical models to avoid – and of course no one minds the extremes to the upside.

So, can the markets keep marching up? Yes. Does that mean the risk of falling grows? Yes. Which is why our committee has designed investment strategies to take advantage of making money when we can, but avoid the worst of the drops.

Make sure you have a strategy you can live with now because when it finally does drop, you need to have a plan that you can stick with.

Just remember that all is not doom and gloom!


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1- Research Summary August 4, 2017. Ned Davis Research Advisory. [8/4/17]

2- Fixed Income. Ned Davis Research Group. August 3, 2017. [8/4/17]

3- U.S. Ned Davis Research Advisory. August 2, 2017 [8/4/17]


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