How to Invest In a Late-Stage Bull Market
by Alexander Green, Chairman, The Oxford Club

A Rare “Birthday” For Today’s Bull Market

In our January 2000 Communiqué, for example, The Oxford Club warned members that Internet stocks had become “the biggest investment mania of our lifetimes – and perhaps of all time.” The leading index of Internet stocks subsequently declined almost 90% over the next 34 months.

We were silent on the market for most of the next two and a half years. But in October 2002, we published an Oxford Insight entitled “Ten Reasons to Get Bullish Now.”

As luck would have it, the most damaging bear market since the Great Depression ended the very next week, prompting one reader to later remark that we were “the best non-market-timing market timers I’ve ever seen!”

We’ll take that as a compliment, I guess. But where do we stand today?

We’re back to square one, in my opinion. The S&P 500 is neither terribly cheap nor terribly expensive at its current valuation of 18 times trailing earnings.

And last week, this bull market did something that only four others have done since 1942. It had its fifth birthday.

As Paul J. Lim noted in yesterday’s New York Times, “On Oct. 23, barring an 11th-hour plunge, this bull market will turn 5 years and 14 days old, surpassing the 1982-1987 period as the third-longest bull run in the last 75 years.”

Optimists will celebrate, telling us that the “the trend is your friend.” Pessimists, on the other hand, will remind us that “every party eventually comes to an end.”

And, regardless of who you side with, it’s indisputable that each day we get closer to the end of this one. It’s just a matter of time before Little Red Riding Hood meets a stranger on the way to Grandma’s.

However, bull markets rarely die of old age alone. They generally expire when the economy rolls over. That hasn’t happened yet.

Furthermore, for the handful of bull markets that have made it past year five, year six turns out to be extraordinarily good. Research shows that in the sixth year of a bull market, stocks rise an average of 25%.

(But before you start counting your chickens, remember Wall Street’s favorite disclaimer: Past performance is no guarantee of future results.)

Still, there are good reasons to believe there’s still some life left in this five-year rally.

Stocks Still Look Cheap

Over the past 65 years, for example, stocks have risen 155% on average during a bull market. Yet equities have gained only a little over 100% since this one began in October 2002.

Moreover, stocks have gotten a lot cheaper. In October 2002, the S&P 500 sold for 27 times earnings. Today it’s a much more modest 18. (Clearly, earnings have risen faster than share prices.) In fact, this is the only postwar bull market where P/Es have come down.

But there are tremors aplenty out there in Equity Land. The credit crunch is still simmering. The housing market has a thermometer under its tongue. And the Fed risks undermining the dollar – and igniting inflation – by aggressively cutting interest rates.

Welcome to the fascinating world of equity investing – where it seems the green lights are never synchronized.

Needless to say, there are plenty of factors to analyze in this late-stage bull market. I’ll be talking about several of them in the weeks ahead.