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For investors, this has been less a bull market than a meh market.

The Associated Press

The S&P 500, the world’s most watched stock-market benchmark, may be hitting record highs, but don’t take that as a sign of irrational exuberance.

Since the end of 2017, major stock indexes around the globe have shot up and down, but without making much headway when all is said and done.

For investors, this has been less a bull market than a meh market. The S&P/TSX Composite, Canada’s major benchmark, advanced all of 1.1 per cent during the 22 months from the end of 2017 to this week. During the same span, the MSCI World Index managed only a paltry 6.1-per-cent increase (in U.S. dollar terms).

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To be sure, the S&P 500 has fared somewhat better – a 13.7-per-cent gain over 22 months – but it is now facing a wall of skepticism. A recent poll by investing magazine Barron’s showed that bearish sentiment among professional money managers has jumped to its highest level in more than 20 years.

Some people may see the rising level of doubt as a signal to run for cover. The problem with that viewpoint, though, is that the case for outright pessimism seems just as weak as the case for unbridled optimism.

So long as stocks’ dividend yields surpass bond yields, as they now do nearly everywhere in the world, people have little motivation to ditch their shares and seek shelter in the supposed safety of fixed-income investments. Stock prices appear lofty, but not necessarily loony once you put them in the context of a world where the major alternative consists of bonds that yield next to nothing or even less.

“We don’t think that asset valuations in general have risen to unsustainably high levels, even though some are now far above their long-run averages,” John Higgins, chief markets economist at forecaster Capital Economics, wrote in a report this week. He argues that so long as central banks keep pushing down short-term interest rates, and the global economy continues to trundle along, there is no compelling reason for stock prices to fall. At current levels, they appear to provide better value than bonds.

Analysts at Man Group, the Britain-based hedge fund operator, have a similarly cautious endorsement of today’s share prices. They point to the recent inversion in the U.S. bond market’s yield curve as reason for concern, because such inversions have typically preceded recessions in recent decades. However, they remain fully invested in stocks because they believe the balance of factors still favour equities over bonds.

What should investors be watching in this highly uncertain environment? Here are three forces that could shock the stock market out of its lethargy, for better or for worse:

Interest rates: If low bond yields are the dark matter underpinning today’s financial universe, any flicker in that force would have major implications for stocks. Nobody foresees higher interest rates any time soon. The big question is how low rates will go and how long they will stay there.

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This week’s meeting of the U.S. Federal Reserve should provide some clues about what to expect over the next few months. Traders are assuming the Fed meeting, which wraps up Wednesday, will result in a quarter-percentage-point cut in the central bank’s key federal funds rate. But investors will be watching Fed chair Jerome Powell for any indication of whether this cut will be the last one for a while.

If that seems to be the case, equity investors may decide the boost from lower rates has reached its end and it is time to start sidling out of stocks. But if Mr. Powell’s comments hint at a willingness to keep on cutting in the months ahead, share prices could surge.

Politics: There was a time when investors could ignore the political rumble going on in the background. Not any more. Trade tensions, a U.S. presidential election, Brexit, climate-change initiatives and moves to regulate the tech giants hang over global stock markets. In Canada, the fate of oil pipelines will have much to say about the outlook for energy stocks.

The most likely catalyst for a big move up or down in stocks over the next few months would be a political shock of some kind. In an ideal world, a peaceful end to the trade tussles between the U.S. and China, combined with good news on issues from Brexit to pipelines, could send stocks on a tear.

Economic growth: The global economy shows every sign of slowing down. But does that mean a wrenching recession lies ahead? Maybe not.

The Bank of Canada’s most recent Monetary Policy Report forecasts 1.3-per-cent growth in gross domestic product this year, rising to 1.9 per cent next year. (The bank will update those estimates on Wednesday, when it releases a new report.) In the United States, the Federal Reserve Bank of Atlanta’s GDP Now indicator estimates the economy is growing at a 1.7-per-cent annualized clip.

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Those growth rates are lacklustre, but are still a long way from an outright contraction. Until GDP numbers begin to show a more definite direction, this meh market is likely to continue. And investors should remain on their toes.

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