4 Reasons the Bull Market Has Only Begun
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Worried that stock market valuations have run too far ahead of economic and business fundamentals? Spending sleepless nights, nervous that the great bull market is long past its sell-by date? On the contrary, we actually are in “a structural expansion of economic activity, profits and employment that probably has many more years to run,” says Anatole Kaletsky, chief economist and founding partner of Gavekal, an independent global investment research firm, writing in Barron’s. Kaletsky offers four reasons for optimism.
1. Firing on all Cylinders
Economic conditions are strong worldwide, with the U.S., Europe and China all enjoying simultaneously robust growth for the first time since 2008, Kaletsky writes. Since inflation appears to be in check, central bankers are likely to continue erring on the side of stimulative loose money policies, he says. With very low interest rates thus likely to persist, current stock valuations are attractive, given that they imply future real returns of about 4% to 5% per annum, in his opinion.
U.S. GDP grew at a 3.3% annualized rate in the third quarter, per the Bureau of Economic Analysis in the U.S. Department of Commerce. This not only beat a consensus forecast of 2.5% from economists polled by Reuters, but U.S. GDP growth has now accelerated in each successive quarter of 2017, CNBC reports.
2. The Fed’s Success
Many skeptics worried that, once the monetary stimulus called quantitative easing (QE) was withdrawn by the Federal Reserve and other central banks around the world, the economy would fall into recession, and stock prices would plummet. Rather, Kaletsky notes, the Fed halted its QE-driven bond purchases in 2014, began raising interest rates in 2015, yet the economy continued to grow, and asset prices subsequently zoomed into new record territory.
3. Low Rate Nirvana
Central bankers in Japan and Europe began their own QE programs in 2013 and 2015, respectively, long after the Fed led the way in 2008, Kaletsky observes, adding that QE is only now beginning in many emerging economies. With other countries planning to maintain near-zero interest rates for several more years, this should, in his opinion, relieve some of the pressure that U.S. tightening places on global asset markets. Meanwhile, unemployment in Europe and industrial overcapacity in Asia are reducing the price pressures that normally come with economic expansion, he adds. This removes a major imperative for a shift to monetary tightening by central banks.
4. Record Profits
Corporate profits in the U.S. have been on an upward trajectory for seven years, and “have probably hit a ceiling,” Kaletsky writes. However, he finds that “the cyclical upswing in corporate profits outside the U.S. has only recently started, and will create new investment opportunities.” Indeed, “Europe, Japan, and many emerging markets are entering the sweet spot: Profits are rising strongly, but interest rates remain low,” he says.
Meanwhile, the average EPS for 20,000 listed companies from around the globe hit a new high, up by almost 19% year-over-year, the most robust growth since 2011, per analysis by FactSet Research Systems cited by The Wall Street Journal. There are, to be sure, several large matters of concern, Kaletsky hastens to warn. These include: rising debt; mixed signals on productivity growth; rising protectionism; and the prospect of political instability should inequality continue to rise.
Not so Long
For a fifth reason, one can add a matter not commented on by Kaletsky. Some think that, at eight years and nine months, the current bull market simply has gone on too long by historical standards, and thus is likely to die of old age. However, since 1926 there have been four bull markets of even longer duration, as measured by the S&P 500 Index (SPX), ranging from 12.8 through 15.1 years, per First Trust Portfolios LP. In fact, according to First Trust’s analysis, the average bull market in this period has lasted nine years, putting the current upswing at below-average duration so far.
