No bull lives forever. Not even the wealth-building Wall Street variety. But if the current bull market, now 5 years old, can stay alive one more year, it will accomplish what the mighty bull of the late 1990s could not: six consecutive years of gains.
That's not to say this bull market, even if it finishes higher in 2008, is in the same league as the '95-through-'99 bull, a moneymaking machine that transformed the Standard & Poor's 500 from a little-known stock index into a household name. The S&P 500 tallied gains of 220% in the '90s run, posting annual returns in excess of 20%. In contrast, the current bull, which rose 3.5% in 2007, is up 67% since the end of 2002.
If this bull is to rival the performance of the '90s juggernaut — or match the eight-year winning streak from 1982 through 1989 — it must overcome stiff headwinds in 2008.
The obstacles confronting Wall Street are well-known and well-publicized: Falling home prices. Rising mortgage defaults. A flood of foreclosures. Tougher loan standards. Tighter credit. Tapped-out consumers. Inflation pressures. Slowing profit growth. Recession fears.
All this, of course, could mean tough times ahead for the stock market.
Much of the bad news, however, might already be reflected in stock prices, paving the way for gains again in '08, says Bill Stone, chief investment strategist at PNC Financial Services Group.
"The market," he says, "has priced in all but the ugliest of outcomes."
Indeed, while the risks mentioned are real and pose a major threat to the stock market, there are also many potential tailwinds that could propel stocks to another positive year in 2008. Those would-be drivers, in no particular order, include:
•The dawn of a brighter future. A lot of bad news is now priced into the stock market. If the storm clouds clear and investors start pricing in a better environment six to 12 months down the road, as they typically do, a rally may materialize.
"Once investors turn their attention to the brighter future that exists on the other side of the current housing and mortgage abyss, stocks are likely to rally," notes Timothy Swanson, chief investment officer at National City Private Client Group.
•Interest rate relief from central bankers. In an attempt to keep financial markets running smoothly and to shield both the U.S. and global economies from the negative fallout from the mortgage crisis, central banks around the world, including the Federal Reserve here in the USA, will continue to lower interest rates, predicts Jeffrey Applegate, chief investment officer for Citi Global Wealth Management.
"Central banks are alert to the issue and want to keep the U.S. out of recession," he says.
The Fed has already reduced the fed funds rate — the interest rate banks charge one another for overnight loans — by a full percentage point to 4.25% from 5.25%. Central banks in Canada and London have also been lowering rates.
While the U.S. stock market is still trading more than 3% below the level it was on Sept. 18, the date of the Fed's first rate cut in this cycle, history suggests the market will eventually perk up thanks to lower rates. "The greatest gains usually come during the second half of the easing cycle," says Paul Hickey of Bespoke Investment Group.