Normally, an anniversary is worth celebrating. But with the S&P 500 having recently celebrated the fifth anniversary of its bull market run, there are many economic reasons to question its longevity. Considering the economic data of the last five years, it may make more sense to question how the bull market ever got to this point.
On March 9, 2009, the S&P 500 hit bottom, closing at 676.53 and capping a 16-month sell-off that saw the S&P 500 shed more than half of its value. Over the last five years, the S&P 500 has more than made up for the loss, climbing almost 180%. The average American has not fared quite as well.
For starters, the S&P 500 is only as strong as the stocks that make up the index. And because those stocks are a reflection of the U.S. economy, they should (one would think) run in step with the economic data. But this hasn’t been the case.
Over the last five years, the U.S. has been saddled with high unemployment, stagnant wages, high consumer debt levels, weak durable goods numbers, a temperamental housing market, waning consumer confidence levels, and a growing disparity between the rich and the poor.
In an effort to appease shareholders, businesses implemented a form of financial engineering, masking weak earnings and revenues with cost-cutting measures and unprecedented share repurchase programs. In fact, in 2013, share buybacks amounted to $460 billion—the highest level since 2007.
More recently, in 2013, the S&P 500 notched up 45 record closes—climbing roughly 30% year-over-year. Yet despite a year full of all-time highs, each quarter, a larger percentage of companies on the S&P 500 revised their earnings guidance lower.
Now, investors are beginning to ask if the economic disconnect can sustain the bull market; after all, one could argue that the bull market has been fuelled more by the Federal Reserve’s quantitative easing policy and artificially low interest rates than strong earnings and revenue growth.
But even there things are changing. After printing off nearly $4.0 trillion during its reign of easy money, the Federal Reserve has started to taper its bond-buying program. Having spent $85.0 billion a month throughout 2013, the Federal Reserve has begun to reduce its monthly expenditure—which currently sits at a princely $65.0 billion a month. At the current pace, the Federal Reserve will be out of the bond-buying game by the end of the year.
The end of the Federal Reserve’s economic stimulus program coupled with a weak jobs market and stagnant wages has left many investors wondering whether or not the U.S. economy can stand on its own.
Still, if the S&P 500 can march higher for five years on weak or even terrible economic data, maybe there is some legitimacy to thinking the S&P 500 will carry onward and upward on lukewarm economic data.
In the U.S., the traditional gift for celebrating a fifth anniversary is wood. In lieu of wood, investors might want to consider the by-product—paper stocks. Investors looking to protect themselves against a market correction or take advantage of a shaky bull market might want to look at large-cap stocks with dividend growth, earnings, and price momentum in the paper sector.
Three stocks that fit that bill include: Raytheon Company (NYSE/RTN), Pitney Bowes Inc. (NYSE/PBI), and Northrop Grumman Corporation (NYSE/NOC).
This article Three Stocks for Celebrating the Bull Market’s Fifth Anniversary was originally published at Daily Gains Letter