Around the world there is a great deal of uncertainty around what is happening in equity markets. Things like high valuations and low volatility are leaving analysts deeply perplexed.
It seems that every few weeks someone is willing to predict an imminent crash. Yet week after week markets keep reaching new highs.
This is why it has been called the most hated bull market in history. Usually one would expect the kind of continued global equity rally we have seen to cause excitement among investors, but the opposite is the case. Investors are cautious, if not fearful, even though stocks keep rewarding them.
For Jeff Saut, the chief investment strategist at US wealth manager Raymond James, this is an anomaly. Speaking at a presentation for Reitway Global in Cape Town, he said that usually you know you’re seeing the peak when there is unmitigated exuberance.
“What we are seeing now is not the way that bull markets end,” Saut said. “They end when people start quitting their jobs to day trade.”
He believes that those who are extremely bearish might therefore not be looking at the markets through the right lens.
“I think we are in a secular bull market,” Saut said, “and we ought to have another six to seven years left.”
A mistake he believes that many analysts are making is to measure the current bull market from the 2009 price low. That, he argues, as only a low point in a secular bear market that had lasted from the time of the dotcom bubble of 2001.
The real start of the current bull market, by his analysis, was in 2013. That is when the S&P 500 broke out of its long-term trading range.
“Nobody measures the 1982 to 2000 secular bull market from the nominal price low in 1974,” he argued. “They measure it from when averages broke out of the top side of the 16-year trading range. But everyone wants to mark this bull market from the 2009 price low. We however think that April 2013 is when you finally resolve to the upside from this trading range.”
In all secular market cycles there will be peaks and troughs. Saut points out that if you consider a bull or bear market a move of 20% or more, there were 13 such short-term moves in the secular bear market between 1966 and 1982.
Even the secular bull market from 1982 to 2000 contained 1987’s Black Monday when the S&P 500 fell 20.5% in a single day. But that was only a correction in a longer-term up-cycle, and, as Saut points out, indices were actually up over the full year.
Another way of looking at the current market is to compare how the S&P 500 is performing relative to other investment opportunities. Between 2002 and 2012, returns from the US market consistently lagged behind those of many other asset classes, including emerging market equities, international real estate and emerging market debt. However, there has been a noticeable change since 2013.
Over the last four years, the S&P 500 has returned 32.4%, 13.7%, 1.4% and 12.0%. In each of those years it was never outperformed by more than two other asset classes.
Source: Raymond James
Saut believes that from a market that has been driven by low inflation, and low interest rates, we have now transitioned into a bull market that will be led by earnings.
“We went through an earnings trough in the second quarter of last year, but earnings are now coming in better than many people believed they would,” he pointed out. “And I believe they will get corporate tax reform through congress, and that could be incredibly additive to earnings as well.”
He said that while Donald Trump’s goal of a 15% corporate tax rate probably won’t materialise, there will be cuts. And even if the final rate is between 20% and 25% there will still be significant benefits.
Saut also argued that although price-to-earnings (P/E) valuations are very high by historical standards, we are now in a different context.
“Yes, if you go back to the 1920s the average (P/E) for the S&P 500 was 15.5 to 16.5 times, but I would argue that there are more high growth companies in the S&P now than in history,” said Saut. “So by definition valuations should be higher.”
There has also been a shift from companies with tangible assets to businesses with significant intangible assets. Apple, for instance, spent a lot of money developing iTunes and although it can’t value it as an asset on its balance sheet, it must have a value. Similarly, Amazon can’t carry the search engine it developed as an asset on its balance sheet. Valuations for companies with these kinds of intangible assets will naturally be higher.
Saut therefore argued that with corporate profits as a percentage of GDP increasing, interest rates only going up slowly and still plenty of liquidity available, there is good reason to be bullish.
“We think the neutrals and positives vastly outweigh the negatives, and that the secular bull market has years left to run,” he said. “So stay invested.”