Stock Market Capacity Utilization Rate
How much potential is left in the current bull market?
by James Paulsen, Chief Investment Strategist, Wells Capital Management
How much potential is left in the current bull market? After all, the stock market is in its seventh year of recovery and has risen more than three-fold from its low in March 2009.
The ultimate capacity of any bull market is of course a complicated calculation dependent on an unspecified and not readily accepted set of factors. For example, how much room is left for improvement in investor sentiment? Are most investors already fully invested in stocks or are they sitting on considerable cash balances? Are valuations reasonable or are they nearing historic highs? How competitive are alternative investment returns? Do policy officials still have room to implement supportive accommodative policies? How young is the corporate earnings cycle? Are company balance sheets strong? Does the economy still have room for improvement or are late cycle cost-push pressures evident?
Capacity utilization is a concept long used when judging the economic cycle. Concepts like the factory utilization rate, the labor unemployment rate and the economy’s output gap help in accessing the age of an economic recovery. In a similar fashion, this note calculates and examines a capacity utilization rate for the U.S. stock market. While no single indicator is ever definitive, based on its utilization rate, the contemporary bull market is no spring chicken.
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