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SKARBECK: Rising corporate profits have justified bull run

March 19, 2016

Ken SkarbeckMarch 9 marked the seventh anniversary of the bull market in U.S. stocks. It wryly has been called the “most hated bull market in history.” The validity of this inexorable rise in stock prices has regularly been questioned by investors and the financial media.

Investor cynicism can be traced back to the taxpayer bailouts (most of which have been repaid), and has continued with the Federal Reserve’s ongoing quantitative easing and zero-interest-rate policy. The seven-year grind to repair the damage to the economy hasn’t felt like the typical setting for a bull market in stocks. Nevertheless, the stock market has delivered a 260 percent cumulative rise from the ashes of March 2009, which equates to a 14.6 percent annualized rate of return.

Many professional investors have loathed this bull market because of their own underperformance versus the stock market. Hedge funds, in aggregate, have severely underperformed. These vehicles, once touted as being run by the brightest and most talented investment managers, failed to shine during this bull market. Most hedge fund clients would have been better served by investing in index funds the past seven years.

Pension funds were largely counseled by their consultants to retreat from stocks following the credit crisis. Regrettably, many institutions were instead advised to seek investments that were designed to protect them from further losses in the stock market—akin to buying earthquake insurance after the earthquake. As a result, institutions have been underinvested in stocks throughout this bull market and have therefore recorded lackluster returns.

Plenty of loud voices argue this bull market has been manufactured by the Fed’s policies and that stock prices have formed another bubble. While there is no question Fed policies were intended to rescue our economy from the Great Recession, that is not what is driving this bull market.

The rise in stock prices is the result of the most important factor that always drives stock values—earnings. Today, U.S. corporations are earning record profits. From 2008 through 2015, aggregate earnings for the S&P 500 companies rose 215 percent. So don’t be fooled by false prophets (pun intended).

Looking back on those dark days in 2008-2009, it took an iron stomach to buy stocks, let alone hold onto the ones you owned. Yet there have been plenty of opportunities to buy stocks at undervalued prices throughout this seven-year stretch. A rational and unemotional analysis of U.S. business valuations in 2010, 2011 and 2012 would have concluded U.S. stocks were cheap.

Today, after seven years of growth, it can be argued that stocks are more fully valued—but even then, market breaks like we had at the first of this year provide new opportunities. This bull market, by some measures the third-longest in history, will someday end just as others did once investors become overly enthusiastic for stocks and bid them up to unsustainable levels. We aren’t there yet.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. He can be reached at 818-7827 or ken@aldebarancapital.com.

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