Gene Salerno, Kleinwort Hambros' Head of Investment Strategy, says concerns around the bull market ending may be premature.
Equities bull market has further to go yet
The bout of volatility that markets endured at the start of this year has led to more than a few nervous flutters among investors, anxiously speculating about when the current bull market will end.
Any edginess may be natural. When compared with markets through history, it would be perfectly reasonable to expect the current bull market to die out soon. Over the past century, the average bull market has lasted for around seven and a half years; we are now over nine years into the current one.
But there are various contextual factors that suggest it may have a little further to go yet.
Those nine years have seen several corrections - defined as a drop of 10% or more from the market’s peak, but less than the 20% denoting a bear market. Since 2009, corrections have occurred in 2010, 2011, 2012, and between 2015 and 2016. Notably, we had one at the start of this year, which is probably the biggest contributor to investors’ current jitters.
But, as those earlier corrections show, this bull market has been anything but a straight line upwards, and in the context of the rough patches experienced already, this sort of wobble looks completely normal.
The underlying conditions of the economy and markets do not suggest an end to the bull market just yet, and I continue to regard equities an attractive investment.
A number of the risk factors commonly cited by financial commentators do not present a material threat.
Geopolitical shocks have proven capable of unsettling markets, but – whatever the event – it almost always results in little more than short term disruption before markets carry on as if nothing had happened. The world keeps turning.
Another oft-cited trigger for a downturn is rising interest rates. But hikes in rates are usually a signal of growing confidence in the economy and its ability to withstand an increase, certainly in the earlier stages of the rate hike cycle at least. I don’t believe interest rates alone will lead to the end of the bull market.
Finally, recession is a perennial concern for many investors, yet a recession is more likely to follow a bear market than provoke one. The conventional definition of a recession is two consecutive quarters of negative GDP growth, yet studies of GDP growth versus returns from equities show little correlation between the two: GDP growth figures are at best a lagging indicator.
A more useful thing to consider is the valuations of equities. Although equities are expensive relative to history on a number of standard measures, again we should consider this in the context of today. For example, a current price-to-earnings (P/E) ratio of 20 times earnings looks expensive relative to a historical average of nearer 12 to 14 times. But a 20 times P/E still provides a 5% yield – i.e. investors are receiving a dollar of earnings for $20 worth of stocks. Contrast this with ten-year US treasuries offering a yield of about 3%. There is still a significant relative value case for equities.
One might argue that equities are higher risk so we should expect this higher yield, yet much of the past 50 years shows otherwise. The earnings yield on equities’ has historically been similar to the yield on 10-year treasuries, and this extra premium associated with equities is a relatively recent phenomenon.
For the vast majority of investors’ portfolios, equities remain the biggest driver of risk and return, So I understand the attention they attract and can appreciate the worries that spring from any turbulence. Still, the underlying conditions suggest to me that equities have more to offer.
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