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Ten years and counting…

Can the argument be made that the longest bull market in history still has a way to run?

By some measures, the current bull market in US stocks is now the longest in history. The S&P 500 has not experienced a drop of more than 20% since March 9, 2009, more than 10 years ago.

The animation below, put together by Corion Capital, shows how this period compares to the four longest bull markets in the past:

This extended rise in US stocks has also translated into a bull market for global stocks generally. Since the US makes up over 60% of the MSCI World Index, the performance of listed equities in New York has driven overall global returns.

Mixed sentiment

The longevity of this bull market has however caused as much consternation as it has excitement. The longer it carries on, the more worried many investors have become that it must be nearing its end.

For Gerrit Smit, head of equity management at Stonehage Fleming, this is however too simplistic a view.

“There has been a perception for a long time already that world equity markets have run very hard in a very long bull cycle and therefore we may be approaching the end,” says Smit. “For me that is not a very convincing argument on a number of levels.”

The first is that despite the length of the current bull market, it has not delivered the highest return of any previous cycle.

As the Corion Capital animation shows, the scale of the current recovery is beaten by both the ‘roaring 90s’ and the recovery from the Great Depression in the 1930s. The rate at which the market has gone up has therefore been fairly moderate.

“That is a very important point to make,” Smit argues. “Despite the length of the current bull market, we are not dealing with an overheated economy, whether in the US or the world, and on that basic principle, one cannot make a case that it now has to come to an end.”

This, he believes, is particularly the case given the current state of monetary policy around the world.

“I probably have more comfort than some others that this slow growth can carry on for quite a while, because of the low inflation environment we are in,” say Smit. “Everything is less cyclical and therefore you have less risk of the economy overheating due to imbalances that develop.

“It may be that we are in for quite a soft landing, with a long landing strip, rather than a cliff around the corner.”

The valuation question

The second important consideration, Smit believes, is that, on certain metrics, equity markets do not look that expensive. As the chart below shows, viewed on a historical price-to-earnings (PE) ratio and a 12-month forward PE basis, the S&P 500 is currently not stretched by historical standards.

Source: Bloomberg, Stonehage Fleming

“The S&P 500 PE valuation is very close to its 30-year average,” Smit points out. “So just on that basic principle, one cannot make the case that equities are overvalued.”

Free cash flow yield and dividend yield tell a similar story. As the chart below shows, they are currently very much in line with long term averages.

Source: Bloomberg, Stonehage Fleming

Not everyone agrees that these are the best metrics for looking at the current market, however. Things look decidedly different if one uses a 10-year cyclically adjusted price-earnings ratio (CAPE or PE10), which divides current prices by average earnings over the past 10 years.

On that basis, the S&P 500 is trading on a multiple of around 30 times, which is much higher than the long term average of 16.9. As the graph below shows, this puts the current market in the 95th percentile historically, only marginally below where it was before the 1929 peak that preceded the Great Depression, and higher than where it was before the Global Financial Crisis.

Source: Advisor Perspectives, dshort.com

Investor sentiment

What is interesting about these competing perspectives is that Smit believes investors are generally more likely to be bearish at the moment than to share his bullish view.

“My impression is that many investors have been uncertain and sceptical for quite a while, and many are underinvested rather than overinvested,” he says.

This is supported by the chart below, which shows market sentiment as measured by the American Association of Individual Investors (AAII). It is currently below average – which means more investors are bearish than bullish – and has been for most of the past year, and even most of the last four years.

Source: AAII, Bloomberg

“The proverbial individual investor is a bit of a contraindicator,” Smit argues. “They are often too optimistic or pessimistic at the wrong time.”

If you agree with Warren Buffett’s dictum that the best time to be greedy is when others are fearful, then perhaps this suggests that now is not a bad time to be buying. Particularly, as Smit points out, because there aren’t many other options.

“The moment we start talking on a relative basis, the argument that you should stay in equities becomes a long stronger,” he says. “They are attractively valued compared to other asset classes, especially because of the low interest rate environment. If we are correct about a continuing environment of moderate growth, that will keep us in equities.”

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Good article Patrick.

Many global yield curves have inverted and valuations seem stretched. Odd’s are in favour of a slowdown within next 12 months imo.

Just wish that bull market would arrive here. My investments have been going sideways, with an overall downward tendency, for the past few years. The last thing we need is a further slowdown.

Most countries outside of the US are in a similar boat:

If you look at the Global equity returns and take out the US portion (MSCI ACWI ex-USA) – you see that the rest of the world has been flat (zero returns) since 2012.

Still doesn’t make me feel better about all the own-goals we’re scoring here in SA.

Referring to Buffet’s dictum I would say that the recent highs are creating excitement among the common investor and fear in seasoned investors, Common investors may well want to jump in, but i have rarely heard of Buffet buying at the top of the market. I understand that he is more of a bargain hunter, buying when a stock is beaten up due to poor sentiment while fundamentals are good. The question that needs to be answered is “are current valuations justified by potential future earnings” Will the PE re-rate downwards once earnings come through? Personally I am struggling to find bargains and feel it risky to buy at current highs…..

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The bull run in the US is being driven by Tech Companies – if this bubble bursts then we will once again enter Bear Territory. That’s why DT is so insistent on protecting Tech companies …keeping a bull run keeps him in power.

Are global flexible unit trusts the answer for those wishing to invest now?

If one looks back at the ALSI over the last three years (yes, I know about Naspers and its weighting in the index), the annual growth was a meagre 4.26% per annum. Over the last ten years (beginning of July 2009 to 2019) it was 10.08% per annum, mainly due to a low base after the financial crisis (just above 22,000, having recovered from under 18,000 two months before). Go back twelve years to beginning of July 2007 and the annual growth is just 5.46%. Add that to the mix already mentioned and it does not seem as if the market is overvalued. Of course, that does not mean that it will not go down. The last 18 months saw quite large fluctuations – down almost 12% between January and April 2018, up again 10% between April 2018 and end of August 2018, and then down again almost 16% to end of October 2018. Then it was up 17% again to late April 2019, down again 8.5% over the next month and since then up again 8.2 a month later. Where to next? Who knows?

Prediction is very difficult, especially if it’s about the future.
— Niels Bohr

Also attributed to Danish poet Piet Hein: “det er svært at spå – især om fremtiden”;
and to Danish cartoonist Robert Storm Petersen;
and many others in slightly varied forms, including Yogi Berra.

The market is expensive in terms of “old” Dollars but is it really expensive in terms of “new” Dollars? Relative value may be the driving force behind the movement in share prices of individual companies, but it does not correlate very well with the longer-term movement of the indexes. There is a much stronger correlation between the growth of investable funds on the one hand and market indexes on the other hand. The Federal Reserve Bank has the power to set the flow of investable funds because they have a monopoly over the creation of money. So, the market will keep on rising for as long as the Fed wants it to.

The global shift towards Modern Monetary Theory implies that the sky is the limit for indexes in terms of Fiat Currency. In real terms, however, measured in terms of gold, the FTSE Eurofirst 300 Index is currently 73% below the high of the year 2000. The SP500 is 64% below the high of the year 2000 in terms of a stable currency(gold).

Reserve Bank action leads us to believe that the market is “high” while in fact, it is still far from the previous highs in real terms. If the risk-free rate is at zero, or even negative, then every perception we may have about value, about cheap and expensive, is turned on its head.

Stock markets over the last 10 years were artificially boosted by easy monetary policy, particularly in US. This 10 year bull market wasn’t driven by valuations and this make it very dangerous. Just watch how stocks react to general news headlines. Huge correction is imminent! This is a very dangerous situation. Fund managers will obviously disagree because they make their money off funds.

Quantitative easing. Only for self supporting country’s. Bonded in structures like NATO, what can go wrong. Local impossible. Implemented anyway, Eskom to will shows profit all the time.

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