The S&P500 and the DJIA are now at historical levels above 1800 and 16000 respectively. So where do we go from here? John Templeton once said that bull markets have four stages. They are born out of pessimism, grow on skepticism, mature on optimism and die on euphoria. Each stage takes a long time. This bull market started about four and a half years ago and hasn’t even reached the optimism stage yet. That means it could be years before we enter in to euphoria. Normal corrections will come. The question is from what level. Though it is hard to predict the short term, we believe the market has the potential to go much higher in the intermediate and longer term time periods.
Some are concerned about how “high” the market is now. However, though the indices are at all-time highs, we are still a long way from the market highs based on the valuation of index components. It is also interesting to note that we are only about 13.5% above the high for the DJIA over six years ago when it was over 14000 in October 2007. With savings paying nearly nothing and the interest rate risk of the bond market, there is little competition for stocks. The underlying fundamentals of earnings, interest rates and liquidity remain sound and continue to point to higher market valuations over time.