This article outlines in my view the need to be cautious/careful of share markets. As you are no doubt aware markets go in cycles and when markets get too frothy they correct. With this in mind thought should be given to capital preservation.
In 2009 the stock market was filled with panic. The housing market had gone under and General Motors was on the verge of bankruptcy reorganisation. The United States was in a deep recession, and stocks had plunged 57 per cent from their high in October 2007.
Fast-forward six years, and investors are enjoying one of the longest bull markets since 1940’s. The Standard and Poor’s 500 index has more than tripled since bottoming out at 676.53 on March 9, 2009. The bull has pushed through a US debt crisis, an escalating conflict in the Middle East, renewed tensions with Russia over Ukraine and Europe’s stagnating economy.
So has this bull run its course? Most market strategists have not yet seen the signs that typically accompany a market peak. Investors are yet to become rash, or overconfident.
“Bull markets end not because they grow old. They end because some excesses build,” says Stephen Freedman, head of cross-asset strategy at UBS Wealth Management.
Why do stocks keep rising?
It’s a powerful combination of higher corporate profits and a growing economy. The main driver is company earnings. Companies slashed costs in response to the recession that began in December 2007. That helped boost profit margins when demand began to recover. As a result, earnings per share have risen consistently since the end of the recession in 2009. Companies in the S&P 500 are forecast to generate record earnings of US$119.35 ($163.40) a share this year, nearly double what they earned in 2009.
Hiring is picking up and costs are down, and that means Americans are more confident about the economy that at any time since the recession. Unemployment has fallen to 5.5 per cent from a peak of 10 per cent in 2009. A plunge in the price of oil has pushed down petrol prices and put more money in people’s pockets. Most economists forecast growth of more than 3 per cent this year. As investors become more confident about growth, they are willing to pay more for stocks.
What role has the Federal Reserve played?
The Federal Reserve has held its main lending rate close to zero since 2008. It has bought trillions of dollars in bonds to help hold down long-term interest rates. By cutting rates, policy-makers have encouraged businesses and consumers to borrow and spend. The historically low interest rates in the bond market have also made stocks look better in comparison.
How does this run compare with previous bull markets?
There have been 12 bull markets since the end of World War II, with the average run lasting 58 months, according to S&P Capital IQ. At 72 months, the current streak is the fourth longest in that period. While this run could be described as middle-aged, it is still a few years short of the longest streak, which started in 1990 and stretched 113 months into 2000.
If you invested US$10,000 at the bottom, how much would you have made?
The S&P 500 has returned 253 percent since March 9, 2009. That means an investment of $10,000 would now be worth $25,262. Investing the same amount in the Dow Jones industrial average over the same time would have turned $10,000 into $22,428.
How long can it continue
All bull markets must end. That’s simply the nature of financial markets. However, few analysts are calling the end of this one just yet.
The U.S. economy is continuing to strengthen and inflation remains tame. And while the Fed has ended its bond-buying program, other global central banks, like the European Central Bank and the Bank of Japan, are still providing stimulus to their economies.
“I don’t anticipate that stocks will face any challenges in the near-term,” says Michael Arone, chief investment strategist for State Street Global Advisors. “If there were some type of a recession, or a slowdown in the U.S., that would hurt for sure … but I don’t see that on the horizon.”
Also, many of the excesses that accompany bull-market peaks haven’t surfaced, says UBS Wealth Management’s Freedman. Think of the housing boom that preceded the bust that began in 2007, or the dot-com mania of 1999 and early 2000.
“Because the recovery has been so sluggish, nobody has had time to go overboard with the type of behavior that’s come back to haunt the markets,” he says.
What kills bull markets?
Typically, it’s a recession. Four of the five bull markets since 1970 ended as investors got spooked by a recession, or the anticipation of one.
Bank of America analysts say that the most likely threat to the bull market would be rising inflation. That could cause a sell-off in bonds, sending shock waves throughout financial markets.
Another threat is a slump in earnings. That could happen if the surging dollar, already at a 12-year high against the euro, grows even stronger, making U.S. goods more expensive to customers overseas and translating into fewer dollars to corporate bottom lines.
Article from NZ Herald 11 March 2015 by Steve Rothwell