By JACK HOUGH
U.S. stock prices have doubled from their financial-crisis lows of just over three years ago, judging by the S&P 500 index. That has investors wondering if the market has rallied too far, too fast.
Quite the opposite, argues Stuart Freeman, chief equity strategist with Wells Fargo Advisors, in a recent research report. History suggests stocks could more than double again in a decade, he says.
Mr. Freeman focuses his analysis on what happened to the S&P 500 after past bull markets -- like the current one -- turned three years old. Since 1973, there have been five examples. The average 10-year return for them (following year three) was 147%. The lowest 10-year return was 57% and the highest was 194%.
There's a sixth bull market that started in January 2003. Returns since its third birthday, reached in January 2006, have obviously not been strong, interrupted as they were by a market crash. The S&P 500 is up 12% so far -- but the 10-year period won't be up until 2016. The bull market that turned three years old in May 1973 hit a similar slow patch but ended with a return of 57% over the 10 years ended May 1983.
Returns for the current bull market over the next 10 years should prove favorable, writes Mr. Freeman, because investors are "very cautious" toward stocks, which has resulted in low prices relative to earnings.
Of course, past performance, as the mutual fund industry is required to remind investors, is no guarantee of future results. Two factors could make the next 10 years dissimilar to periods used in the study.
The first is that U.S. stocks were much more generous to investors than usual during the 25 years through 1999. The S&P 500 returned 17.4% a year, compounded. Those returns may be partly owed to the rise of index mutual funds and workplace retirement plans, which pushed stock ownership higher, particularly among baby boomers. They began retiring last year, so their appetite for shares might taper off a bit.
The second factor is inflation, which raged during the late 1970s and early 1980s, pushing stock prices higher in nominal terms. It contributed more than five percentage points a year to returns over 25 years through 1999 -- and gave a big boost to the two top-performing past bull markets of the aforementioned five. Over the past year, the inflation rate was 2.9%.
Investors are thus right to use caution. But Mr. Freeman's point is worth remembering: Three year-old bulls can have plenty of charge left.