NEW YORK: Is it time to cash out of stocks? The market has nearly tripled in a little over five years, and the Standard & Poor’s 500 index closed above 2,000 for the first time on Tuesday. With each record, the temptation grows to take your winnings and flee.

Plenty of experts think stocks are about to drop. But many others offer compelling arguments for the rally to continue for years.

The bulls point to a strengthening US economy. They also like that companies have plenty of money to keep buying back their own stock. The bears argue that stocks already reflect years of future profit gains. They also note that many economies around the world are stumbling and that US interest rates could rise soon.

BULL CASE

A stronger economy: Four of the past five bull markets have ended with investors selling in a recession, or bailing out because they anticipated one. The odds of a downturn anytime soon? Not very high, at least based on the latest economic reports and forecasts.

The US economy is expected to grow 1.5 percent this year, then 3.4 percent in 2015, according to Congressional Budget Office estimates released Wednesday. One reason is companies are hiring at the fastest pace in eight years.

Low interest rates: Interest rates are low, and that’s been great for stocks. They help lower borrowing costs for consumers and businesses. They also hold down interest payments on bonds, making stocks look more attractive by comparison.

Many investors expect the Fed to start raising short-term rates in the middle of next year. If the Fed keeps the hikes small, the stock market might shrug it off.

That’s what happened in the last round of Fed hikes, in 2004. The S&P 500 gained 9 percent that year.

Torsten Slok, chief international economist at Deutsche Bank Securities, notes that the short-term rates that helped drag stocks down at the end of the last seven bull markets were all higher than 4 percent.

Buyback boom: One of the biggest forces in the stock rally so far is companies buying back their own shares. Companies in the S&P 500 have spent $1.9 trillion on buybacks since the bull market began in March 2009, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.

BEAR CASE

Stocks not cheap: It’s fine to forecast big profit gains well into the future, but what if prices fully reflect expected gains?

That’s what many bears think. They cite the price-earnings ratio, or the price of a stock divided by its earnings per share. If a share costs $100 and the company is expected to earn $5 per share in the coming year, the P/E ratio is 20.

The S&P 500 now trades at 15 times what companies are expected to earn over the next 12 months, according to FactSet. That is slightly above the 10-year average of 14.1.

The problem is, P/Es are often not reliable gauges of stock value. They are based on just one year’s earnings, which can rise and fall along with the economy.

Those coming rate hikes: The Fed may be able to raise rates slowly without damaging the economy and stock markets. But its record isn’t entirely reassuring.

Three of the past five bull markets ended after the Fed increased rates. If the central bank finds itself scrambling to contain inflation and has to raise rates sharply, stocks could fall 20 per cent.

Struggling economies abroad: US companies rely more than ever on foreign economies remaining healthy. Unfortunately, many of those economies are stumbling.

Most economists expect the US to shrug off the troubles abroad. But not everyone. David Levy, an economist, predicted the last US recession with uncanny precision. He says another one is coming next year. The cause: Downturns elsewhere, not domestic trouble.

Even if he’s wrong, slowing economies overseas will still matter since companies in the S&P 500 generate nearly half their sales abroad.

Published in Dawn, August 31th, 2014