5 Signs That the Stock Market May Melt Up

Why fears of a stock market swoon may be overblown.

ByABC News
September 30, 2014, 6:28 AM
It's still morning in America when it comes to the stock market, which may have years of gains ahead of it despite current jitters.
It's still morning in America when it comes to the stock market, which may have years of gains ahead of it despite current jitters.
Getty Images

— -- The historic market decline of 2008–09 has since been ruefully referred to as the “market meltdown.” The decline scared money out of stocks and into cash for one, two and even three years after the market started ascending in 2009. Fears of a repeat prompted many to sell low, only to buy high when getting back in.

The ensuing bull market has run hard — so hard that many, citing historical patterns and doubtless stung by the meltdown, talk about an approaching correction or a more severe decline. While many other market observers aren’t pessimistic, few are highly optimistic about the next several years. Maybe they don’t want to be accused of irrational exuberance.

While exuberance, irrational or otherwise, isn’t my style, I believe the market will probably continue to ascend for the next few years. And rather than another meltdown, I believe we could very well have a rapid rise — what I call a melt-up — amid sustained growth.

Many investors are concerned that we’ve had more than 750 trading days without a substantial pullback. But this isn’t unprecedented. In the period from 1928 through 1973, the average bull market lasted 1,140 trading days, and from 1974 through 2007 (the end of the last bull market), the average bull run lasted 2,600 days. If history is any guide, the current bull market is probably less than halfway through its life span.

Some say (arbitrarily, I believe) that after exceeding 17,000 in recent weeks, the Dow Jones Industrial Average isn’t likely to go much higher. But, stung by the meltdown, many doubted the growth that has brought us where we are today from 2008, when the Dow was at 10,000. At this rate, given current factors, the Dow may hit 20,000 by the end of next year.

Driving this growth will be the continued increasing flow of money into the stock market, driving up values. One reason for this is the lack of viable alternatives. People have to put their money somewhere. Bond yields are low, commodities have been hurting, and real estate gains are lackluster. So the demand for stocks will continue to rise.

And there are fewer stocks around these days because of mergers and acquisitions, companies like Dell going private and other factors. In 1997, the number of stocks listed on exchanges in the U.S. peaked at 8,800. Now, there are about 4,900. In the late 1990s, the Wilshire 5000 had more than 7800 stocks included in the index. Today, the number has dwindled to about 3,700 stocks. So, with the twin scenarios of increasing demand and decreasing supply, the existing supply of stocks will, on average, rise in value as money pours into the market.

Also, demand is increasing from investment trends among huge institutional investors, including large endowments and pension funds. The percentage of assets that these big investors had been putting into non-stock investments had been increasing, but that trend has begun to reverse. If that continues, it could mean the eventual rotation of about $3 trillion back into the stock market — a 17 percent gain in the S&P 500. Notable among early adopters of this trend is CalPERS (California Public Employees Retirement System), one of the biggest institutional investors on the planet. CalPERS has announced it will be pulling money out of alternative investments and derivative investments such as hedge funds and putting it into plain old stocks.