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With stocks flat for a year, is it still a bull market?

·Michael Santoli

We were right here a year ago, yet it felt so different.

For all the noise and drama of a roiling world economy and high-stakes policy decisions, big U.S. stocks have gone almost exactly nowhere since mid-September 2014.

The S&P 500 then was at 1985, and Friday it closed at 1961, down just about 1% over that span. The index then and now had almost exactly the same multiple on past and forecast corporate earnings. The dividend yield was just above 2% in each instance.

And back then, Wall Street was bracing for the Fed’s gentle withdrawal of stimulus by ending quantitative easing. Today, the Street is vibrating with anticipation of the Fed’s gentle withdrawal of stimulus by ending zero interest rate policy.

Yet how we got from there to here, and the mood accompanying these matching index levels, tell us plenty about the balance of risk and opportunity today.

A year ago, the S&P was up 7.4% year to date, while today it’s down 4.7%. Then, a waterfall drop on global growth and policy fears loomed ahead in October. Today, we just had an even nastier cascade decline and are now navigating the treacherous aftermath. One year ago, investors were about to embrace Alibaba Grouop (BABA) as the largest and most-hyped IPO of all time. Today, Alibaba shares are down 30% form their first trading price and today the buzz is all about a Barron’s cover story arguing the stock could be cut in half from here.

Investor sentiment, by just about every measure, is profoundly different from September of last year, when optimism prevailed, and most investors would have been alarmed and disappointed to learn that the S&P would be flat twelve months hence.

Every survey and market-based indicator now shows elevated fear among investors, with, for instance, the Citigroup Panic/Euphoria index sinking back into panic mode similar to levels in mid-2012 and the fall of 2011. It is perhaps the top reason that clever market watchers have some hope that most of the bad news is already priced in.

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The capital-markets backdrop, though, is a bit less friendly today. Spreads on junk bonds are up from 4 percentage points a year ago to 5.5 today. The St. Louis Fed Financial Stress Index has surged from record lows to about a three-year high now.

The CBOE S&P 500 Volatility Index (^VIX) is a component of that stress index and it remains stubbornly elevated in the mid-20s.

For the market to earn back the immediate benefit of the doubt, it should subside a good deal further. And, as for the S&P 500 itself, traders want to see it sustain a move at least up toward the 2000 level and defy the gravitational pull of a weakening long-term trend.

If a prescient forecaster a year ago said, “Stocks will hit a new high up less than 3% early next year before giving it all up to trade flat for the next year, but the US economy itself will be stronger” would that have seemed a reasonable outcome after a 200% gain to that point since the 2009 low?

We are set up nicely from a short-term trading and psychology perspective for some kind of rally almost regardless of the Fed’s rate decision in a few days. Most stocks have been discounted far more than the market as a whole, so some hints of macroeconomic steadiness would create buying chances in some cheaper cyclical stocks.

Yet the bull’s a year older and, as noted, the financial weather isn’t as mild. A weight-of-the-evidence approach to discerning whether this is just a tough correction or the start of something worse [The weight of the evidence] still seems to favor the case the bull market hasn’t yet ended – even if this call remains an uncomfortably close one.