Calling what we're experiencing a bull market is like calling the Grand Canyon a ditch.
First of all, this rally – the one that sprung us from the depths of the Great Recession, and has pushed the S&P 500 170% above its 2009 low – has largely regained lost ground. This historic "rally" has taken the bellwether index just 265 points beyond its October 2007 peak.
In other words, 153 percentage points of the rally since 2009 were necessary just to get us back to 2007.
We're up only a modest 17% from the old highs.
I wouldn't call that overdone. I call that a leg to stand on. And it's just the first leg.
This, as you'll see, is a generational bull market…
We're Not Overpriced, Even in a Record Market
The dividend yield on the S&P 500 back on Jan. 1, 2007, was 1.76%; as of Jan. 1, 2014, it was approximately 1.90%.
The benchmark's trailing price earnings multiple at the 2007 peak was 17.5. Today it's 19.
For some, perspective on whether today's average PE is high is based on PEs from Jan. 1, 1980, through Jan. 1, 1990.
The 1980s PE averaged 11.89; the 1990s PE averaged 21.73.
And the 2000 through 2010 PE averaged 29.58, a period skewed by the Jan. 1, 2009 PE of 70.89.
But if we replace the January 2009 PE – essentially, an outlier – with the 1990s average of 21.73, the 2000 through 2010 average is much lower.
With that adjustment, the 1990 through 2010 average PE is 23.42. So today's PE of 19 isn't flashing any warning yellow lights.
According to Birinyi Associates and WSJ Market Data Group, the market capitalization of the S&P 500 at the old October 2007 peak was $13.8 trillion. It fell to $5.9 trillion at its 2009 low. Today it's back up only slightly from the old peak to $13.9 trillion.
The whole market had a value of $20.9 trillion at the 2007 high and is up just 2% over the last six years to $21.4 trillion.
Whether you're looking at relative price earnings multiples or weighing valuation metrics, stocks don't appear to be overpriced or overvalued. In fact, they look poised to go higher, probably a lot higher.
Prices go higher when there are more buyers than sellers. But, there's an even bigger dynamic at play than buyers and sellers – there's the supply and demand equation.
More Equity Money and Fewer Equities Means Rising Prices
According to the World Federation of Exchanges, there were 9,000 companies listed on all U.S. exchanges in 1997. Today there are 5,000 listed companies; that's a 40% drop.
The shrinking number of listed companies parallels the rise of giant and specialty private equity buyout shops who have been taking companies private. At the same time, the 2000 tech bubble bursting reduced the former flood of IPOs to less than a trickle over the past 13 years.
The low interest rate environment engineered by the Federal Reserve also allowed companies to borrow cheaply to buy back their own shares. That's reduced supply too.
The combination of rising prices from companies buying back their own shares, more demand from sidelined investors coming into stocks as prices rise, and ever-larger pools of institutional investment capital chasing a considerably tighter supply of shares all lead to one thing: stocks to continue to rise.
With supply reduced, it won't take a lot of additional demand to propel stocks higher.
And there's good news on that horizon, too.
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.