The Lowdown on Markets to 24th February 2017
World Markets at a Glance
In this week’s issue
- The bull market remains intact as we edge nearer to its eight year anniversary in March.
- Clearly, the most important thing to watch for is valuations especially in certain markets.
- Equally stocks still look cheaper than bonds and in certain individual cases still attractive.
- The value shoppers, momentum players and late comers have enjoyed the bull market.
- Are we now on the cusp of a rejuvenated bull market based around Trumponomics?
- Global investors will be mindful of the politicians and central banker’s future actions.
“Bull markets don’t die of old age”
As we move ever nearer to the 09th March 2017, which will be the eighth anniversary of this current bull market, countless financial analysts, market watchers and astute investors are beginning to ask the obvious question “how much longer can this extraordinary stock market rally continue”.
Well it’s a stock market fact that “bull markets don’t die of old age”, but then again, the last leg of a bull market tends to end in hysteria, whilst the last leg of a bear market ends in panic. Clearly, since the US presidential elections back in November 2016 the markets, and particularly Wall Street, have embraced Donald Trump’s victory, his president’s inaugural speech, and the promise that he will put “America First”.
“Have these markets rallied too far too soon”
Understandably, the euphoria that has followed his victory to the White House has pushed a number of the stock markets around the world higher and in some cases to all-time highs. This in turn, has led to another question being asked “have these markets rallied too far too soon”, and if so, are we now facing a severe sell-off in the not too distant future.
Clearly, the most important thing to watch out for is valuations on certain markets, which in the case of Wall Street does look richly priced at 18X, in fact, at current levels it’s above their five, ten, fifteen and twenty year historical averages, if you take into account the future analytical projected S&P earnings data.
However, this does not mean that the market is going to correct anytime soon, indeed, there is no actual level at which a forward P/E ratio is worrying, meaning it could continue to rise, and of course, we are nowhere near the levels that we saw back in 1999/2000 just before the tech bubble burst.
Equally, whilst stocks do not look as expensive as bonds, for equity market to continue to trend higher then much will depend on the outlook for corporate earnings, and indeed, from a wider perspective, the growth of the global economy, the political backdrop, central bank policy and geo-political risks.
“You can thrive in a bear market”
Admittedly, for this second longest bull market in financial history to go beyond the longest, which spanned some 4,498 days from 1987 to 2000, stock markets, will need to avoid a bear market until 2021. But of course, you can thrive in a bear market, just like you can in bull market; it’s just means that you need a different investment mentality and to adapt your investment decisions accordingly.
For instance, in a bear market an investor needs to use sharp countertrend rallies to sell into, in fact, remember what the legendary Sir John Templeton once said, “for those properly prepared the bear market is not only a calamity but an opportunity”.
Also it is important for any investor to be able to adapt to different market conditions, whether it be a bull or bear market. By the same token, another legendary investor, Peter Lynch, once said “you get recessions, you have stock market declines, but if you don’t understand what’s going to happen then you’re not ready, you won’t do well in the markets”.
“Are we on the cusp of a further bull market rally”
And so looking at the current markets are we on the cusp of a further bull market rally, or is there something more menacing awaiting the global investor. Clearly, back in March 2009 the markets bottomed out and in the early stages of recovery we saw the “value shoppers” entering the market which continued until 2013 when the “momentum players” began to participate which has then led to the “late comers” contributing to the rally over the last couple of years.
However, over recent months all of the market participants have now been enjoying what is being heralded as the “Trump trade” or “Trumponomics”, and if history is any indicator the Trump rally might have a little further to go. And why do we say that, well the Trump presidency is experiencing a similar honeymoon period to that of Ronald Reagan, who was elected as the 40th US president in November 1980. In fact, from his Election Day in November 1980 until April 1981, the Dow Jones Industrial Average Index rallied some 15 per cent under the economic banner of “Reaganomics”.
Similarly, under “Trumponomics” the same index has rallied by about 13 per cent with a couple of months to go until April. But unfortunately, the Reagan honeymoon period came to an end and the market collapsed, in fact, a bear market was recorded between the period of November 1980 and August 1982. Now of course, the economy was very different then given that the 1980’s were trying to recover from a very inflationary 1970’s period. But never-the-less, the Federal Reserve Bank was on a mission and fiscal tightening was the order of the day. Clearly, we do have a pick-up in inflation at the current time, under the Trump administration, and it would appear that the Fed is becoming more hawkish.
“Time is your friend impulse is your enemy”
Admittedly, global growth is expected to rise in 2017 led by a more optimistic view on the emerging markets, lesser than expected effects from Brexit, and a boost from fiscal loosening in the US, but of course on the flip side, we do have political risks in Europe, with the forthcoming elections, concerns over China, in respect to currency and trade wars with the US, a Trumps protectionism posture, and geo-political risks from Iran and North Korea.
However, there is still a sense of positivity in the markets, and we do have the president’s speech to the US Congress this week which could help the markets rally further given that global investors are expecting him to “talk the talk”, and then follow that up by “walking the walk”, any retractions from his economic policy promises would therefore be negatively regarded by the markets. Arguably, bull markets don’t die of old age, they just give way from time to time to a bear market, which then gives way to another bull market.
Finally, as we enter early spring and perhaps some investors nerves might begin to show it might just be worth remembering another very wise investor’s comment “time is your friend impulse is your enemy” – Jack Bogle. Whether over the coming months the markets continue to trend upwards, or indeed, they give up some of the gains, it has always been a wise decision for long term investors to buy into weakness, in fact, if you look at the bear market returns versus those from bull markets you will see that since 1929 to-date, the average return from bear markets has been -45 per cent whilst from bull markets it has been +154 per cent.
Peter Lowman Chief Investment Office
Peter Lowman Chief Investment Officer Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .