Why The Best of A Bull Run Comes Last
In my last Wealth Wach article I alerted you about two high-profile investment firms, GMO and Morgan Stanley, who both recently issued warnings that U.S. stocks could face stiff head winds going forward.
Perhaps including negative average returns approaching -5% per year.
But before you hit the panic button and sell all your stocks, there is a silver lining to these gloomy forecasts.
Jeremy Grantham, the chief investment strategist for GMO, is on record.
And although he states his firm’s outlook for U.S. stocks calls for negative real returns over the next seven years, he also notes there is a strong possibility of a parabolic move higher for the S&P 500 before then.
He describes this as a “melt-up” scenario.
In a GMO report published in January, Grantham pointed out that although this is one of the “highest-priced markets in U.S. history… we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.”
He goes on to make the case that the S&P could surge 60% or more over a period of just nine–18 months.
That’s if stocks follow the same pattern of past market melt-ups, as you can see in the chart below.
If this scenario plays out, the S&P 500 could soar to 3,400–3,700. Perhaps even higher, up substantially from the recent lows.
And Grantham isn’t alone in expecting a big “melt-up” for stocks in the near term. His findings are also backed by research from Merrill Lynch.
Analysts at Merrill studied the historical total return potential of the S&P 500 index preceding past market peaks. What they found was that the biggest returns often occur at the tail end of a bull market. A year or two prior to the peak.
Historically the S&P has surged an average of nearly 60% in the final two years of a bull market with stocks gaining 25% on average in the last 12 months in that time frame.
Astonishingly, 45% of the entire bull market returns happen in the last two years. Nearly HALF of all the upside gains.
Talk about saving the best for last!
You can see why this is called a “melt-up” scenario.
Now, it’s difficult to say whether the stock market will follow the typical melt-up pattern like it has in the past.
But so far, during the last two years, the S&P 500 is up just over 25%. It looks to me like stocks are on track for even more gains before this historic bull market draws to a close.
Here’s something else to be aware of: Research from both GMO and Merrill agree that high-quality stocks often outperform the S&P 500 during the later stages of a bull market.
That makes the kind of stocks I’m recommending to readers of my new Infinite Income service prime candidates for a stock market melt-up!
For access to my new premium service, Infinite Income, and all my top-shelf plays click here.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch