The Most Unloved Bull Market in Living Memory

From the ruins of the 2008 financial crisis, a bull market is born and on August 22 2018, it has become the longest bull market in history. Underpinned by ultra-loose monetary policy at central banks and later accelerated by the global economic recovery, the bull market has surged in an upwards trajectory uninterrupted.

Legendary investor Sir John Templeton once said: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” Even as indexes reached record levels last year, I felt that there is a lack of euphoria. Investor pessimism, or at best, skepticism plagues the current bull market for years. Investors are still hesitant to embrace this bull market, many are long expecting it to tank and this is where they are wrong.

From all these, it is probably safe to say that this is the most unloved bull market in history. Not that it is bad news, in fact, I believe that this could even prolong the bull market and keep the bear in deep hibernation for a while longer.

Once Bitten, Twice Shy

Most investors are still spooked by the previous financial crisis and these deep scars has bred the ongoing skepticism. It is probably why the level of euphoria that Sir John was always looking out for as a sign of overvaluation of the equities market is still not here yet. An interesting chart below shows the number of times the media has proclaimed the bull market slowing down and reaching the end of its cycle, even though it just keeps going up.

Lacklustre Economic Growth

Instead of a sharp recovery that is usually associated with aggressive monetary policy, we see more of a slower-paced recovery which means that we do not need an immediate tightening of monetary policy. The recent Trump tax cuts have also provided a boost to fiscal policy and if we combine it with easy money, the economic growth will be well supported as inflation and interest rates rise towards normal levels.

This is also one of the main reasons that people are not buying into the bull market. We see companies reporting poor earnings and falling short of their expectations. This led to PE ratios are stretched above historical average levels. However, when there is a steady inflow of funds and global central banks willing to issue credit, you will see money flowing into the market, despite poor market conditions. It is evident in the astronomical valuations of the FAANG stocks. I’m not saying that value investors are wrong to proceed with caution, but there is a difference between being right and making moolah.

The Push from Share Buybacks

The low interest rate environment has encouraged corporations to buy back their shares by borrowing money at low cost. As I have mentioned in my previous article, this inflates EPS and ROE without increasing the profitability of the company. With corporations unable to find profitable investments to increase their revenue in this tepid economy, the responsible thing to do for their shareholders is to return money to them by share buybacks or dividends. This has led to companies themselves being large buyers of equities over the past decade and this will still continue even as liquidity has fallen to record lows.

Conclusion

If what I’ve discussed above are all true, we might take a while to see things return to normalcy. Perhaps time is what we needed to recover from the 2008 financial crisis shock. Also, as interest rates and inflation continue to go higher, bonds could potentially have weak returns and stocks may need to perform better to outrun the higher discount rates and lower valuations.

It’s tough to make predictions, especially about the future. The trade war spat escalating, the end of easy money as central banks ramp up interest rates or even a “black swan” could knock the record run off course.

Cheers.

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