Just because this aging bull market, already four years old, has hit record highs this year doesn’t necessarily mean that it’s about to end. In fact, although only about one-third of bull markets since 1945 have lasted this long, 83% of those that were able to celebrate their fourth birthday continued to run for at least another year, gaining an average of 21% in that fifth year.

Reasons this bull market will likely notch further gains…

Stock valuations are not frothy. At recent levels, the Standard & Poor’s 500 stock index was less pricey than at any other time when it reached record highs since 1980. The average stock price-to-earnings ratio (P/E) when the S&P 500 was at peak levels in past bull markets was 19.9. Recently, it was just 15.

Irrational exuberance is missing. Many skeptical investors are just now getting back into the stock market. There are few signs of consumer overspending and overborrowing. The ratio of payments on personal debt to disposable personal income has fallen to its lowest level since 1983.

The economic recovery is slow but steady. Typically, at the peak of bull markets, the economy is growing at a brisk 4% annual rate and the unemployment rate is below 5%. In 2013, however, the economy is expected to grow by just 2.7%, and the unemployment rate recently was 7.6%. As long as there is some economic growth, even if it has slowed in recent months, investors see it as a positive signal to get into or stay in the market.

The Federal Reserve has our backs. Its monetary easing policies—aimed at strengthening the economy—continue to pump an average of $4 billion of new money into the financial system every business day. As a result, short-term interest rates aren’t likely to go up until mid-2015 or beyond. Many bull markets die when the Fed raises rates to stem inflation—but today there is little evidence of inflationary pressure.

Related Articles