The Bull Market Turns Five

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From Standard & Poor's Equity Research

12-Month Projected Prices for the S&P 500

S&P 500 Annual Bull Market Changes

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What's more, the S&P 500 typically caught a second wind during the fourth year, as evinced by its 13.2% average performance—the third-strongest of all six. The fifth year has frequently been a fake-out. Historically, the S&P 500 has either quickly rolled over and died—as in 1946 and 1961—or marched on to a healthy return of almost 9%. During the 12-month period that is just about to end, the S&P 500 is on track to post an advance of nearly 15%, more than 6 percentage points above the average gain in fifth-year bull markets.

The $64,000 question is whether the S&P 500 will celebrate its sixth year and post a double-digit gain like three of the four bull markets since 1942, or crash and burn soon into its sixth year, as in 1980. S&P's equity analysts, using their 12-month target prices for S&P 500 companies, project this U.S. large-cap benchmark to advance nearly 12%, ending September, 2008, near the 1700 level.

Factors acting as catalysts to their optimism include a 13% forecasted increase in operating earnings for the S&P 500 in 2008, following a 6.6% projected rise for 2007; at least two more Fed rate reductions of 25 basis points each by the January, 2008, FOMC meeting; and a 9% decline in the value of the dollar against a trade-weighted basket of foreign currencies.

Fascinating Forecasting

If fundamental projections, based on discounted-cash-flow analysis, relative peer valuations, and sum-of-the-parts techniques aren't convincing enough, consider these additional reasons to believe the S&P 500 will likely celebrate its sixth birthday next October and post a respectable gain in price.

Next year is a Presidential election year, typically the second-strongest year in the four-year Presidential cycle. Since 1945, the S&P 500 gained an average 8.6% in an election year (without dividends reinvested) and posted an advance 80% of the time. I think this strength could be a carryover from the stellar average performance of the third year of a President's term in office, in which investors attempt to anticipate the benefit to the economy that a stimulus package initiated by the party in power (that wishes to stay in power) works its way through the economy and into voter's wallets. Of course there is no guarantee this will happen in 2008, but the track record is still encouraging.

And speaking of the figure "8," since 1945, years ending in 8 have gained an average 14.2% and risen 83% of the time. I have absolutely no explanation as to why this is the case, but since I did the work, I wanted to share the results.

So there you have it. S&P equity analysts are projecting a favorable 12-month period. And if history serves as a guide, we just may get it.

Stovall is chief investment strategist for Standard & Poor's Equity Research Services .