Enjoy the golden era while it lasts

By Liam Dann

New Zealand Herald 17 May 2018

Don't write off the bull run just yet.

When Wall Street fell into correction territory in February it looked like the golden run might be over for stock markets around the world.

But after a volatile couple of months, the local share market at least finally roared back into record territory last week.

On Wednesday the NZX-50 hit the first new high we'd seen since early March.

It will have been a relief for investors after what has been a pretty volatile year. The first three months saw many KiwiSaver funds delivering negative returns — something few in the scheme will be accustomed to.

In the US, markets have also been extremely choppy, although the S&P 500 has bounced its way back into positive territory.

As became apparent last year when the boom was unambiguously still in full swing, share markets are not particularly perturbed by the political uncertainty — whether that be Brexit, Donald Trump or even MMP throwing up a left-leaning coalition Government in New Zealand.

But, with something of a perverse correlation, evidence of increasingly robust economic growth in the US and around the world has seriously spooked equity investors.

As the global economy wakes from the long post- GFC malaise, it has become apparent that US interest rates really are on the march back to normal levels.

Consequently, each new piece of positive data has sent the yields on the forward-looking bonds markets spiking higher.

The big Waitangi Day sell-off was blamed on a sharp leap of the yield of 10 Year Treasury bonds towards 3 per cent.

When that yield finally did hit that big scary "three" on the graph, in late April, the reaction wasn't quite so bad, although the Dow Jones still dropped more than 3 per cent between April 17 and April 25.

Yields fell again soon after.

The good news is that investors now seem to be adjusting their expectations.

When the 10-year Treasury yields went through 3 per cent again last week the market ignored it.

Instead we saw a surge as Trump's latest foreign policy move — pulling out of the Iran nuclear deal — pushed oil prices up and breathed life back into US energy stocks.

Touch wood, but this is starting to look like the orderly transition to higher rates and a steadier market that we had all hoped for.

In theory a gentler rise in share prices as economic growth rolls gently on should give corporate profits a chance to catch up with valuations. That's still just theory of course, and though things have looked good this month we have to negotiate at least two more Fed rate hikes this year.

The bull market is now in its 10th year — it's coming off a post-GFC low point in early 2009. Logic suggests we're closer to the end than the beginning.

Perhaps there is a crash waiting just over the horizon of the latest upwards curve. There's certainly no shortage of doomsayers to tell us there is, and no doubt they'll be right — eventually.

Yes, the world is up to its neck in debt and the logic of those who predict a GFC mark two is not far-fetched.

But the return to growth, in both Europe and the US, has been so slow that, despite the length of this expansion, there is a good case for optimism.

However long the bull runs, there is a chance to make the most of a market which has enough volatility to create opportunity for traders, but which retains some momentum to drive good returns for the bulk of the world's savings.

That's no small thing as the baby boom generation nears retirement and the call on those massive global super funds grows ever nearer.

Those demographics will ensure the financial sector faces a big structural shift over the next 20 years.

It's important to plan and prepare for that.

But, however it plays out, it would be a shame to spend the last of this golden era shrouded in pessimism.

● Liam Dann is the Herald's business editor at large.