The Stealth Drivers of the Record Bull Market
Why has the upswing in the United States stock market lasted for so long?
Posted — UpdatedWhy has the upswing in the United States stock market lasted for so long?
The simple answer: The economy and corporate profits have been growing for most of the current bull market.
But this rally has had drivers not fully appreciated, perhaps because of a dearth of enthusiasm surrounding its rise. The current bull market occurred in the aftermath of the 2008 financial crisis, a period in which the economy trudged, household incomes only nudged higher and stock market gains mostly went to the rich.
Still, the S&P 500 is up by 324 percent over almost 9 1/2 years. Some things clearly went right. Here are three factors that did not get the attention they perhaps deserve.
U.S. financial firms often acted as engines of instability during past bull markets. Banks unleashed lending binges that fueled economic growth and increased stock prices. But when borrowers defaulted, banks pulled back sharply, making economic slowdowns and stock market crashes all the more severe. The financial excesses of the five-year bull-run that ended in 2007 illustrate the central role banks can play in creating conditions for a bust.
After 2008, the Federal Reserve and Congress required changes — such as safer balance sheets and lending practices — that largely stopped banks from acting in such a destabilizing manner. In the years since the financial crisis, banks have continued to lend to individuals and companies as well as raise money in the markets for their clients. And they have remained profitable. In the first quarter of 2018, banks’ profits were equivalent to 1.28 percent of their assets, which is significantly more than the 1.03 percent median return since the mid-1980s, according to data from the Federal Deposit Insurance Corp.
Many investors feared that stock prices were being artificially supported by the Fed’s extraordinary post-crisis monetary policies, such as its enormous bond-buying programs. There were two main concerns: First, the policies might cause inflation to take off; second, once the Fed withdrew support, it could set off chain reactions that would cause the economy to slow and the stock market to fall. Neither has come to pass, at least so far.
The Fed’s policies might not have been as loose as they appeared. On a nominal basis, interest rates were indeed cut to historical lows. But what mattered is whether they were low after adjusting for inflation. It appears corporate borrowers did not get a huge break from the Fed: During the most recent bull market, the yield on corporate bonds rated BAA by Moody’s (a good and historical proxy for average corporate borrowers) was 3.7 percent on average, after adjusting for inflation. That compares with an average of 4 percent since 1950.
When the United States became the epicenter of the financial crisis in 2008, it seemed unlikely that it would become a beacon for investors in the next decade. Yet, for the most part, that’s what happened. Europe’s economy took much longer to recover than the United States', mostly because of the region’s sovereign debt crises and a faltering approach to overhauling its banks. In emerging markets, a six-year slowdown that ended in 2017 deterred foreign investors.
Almost by default, the U.S. stock market became the most attractive place to invest. It only became more enticing as large U.S. technology companies kept delivering impressive results. In 2008, U.S. stocks accounted for 36 percent of the total value of the world’s stock markets, compared with 41 percent in 2017, according to data from the World Bank.
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