FYI | Feb 18 2015
By Peter Switzer, Switzer Super Report
Two interesting observations from Nobel Prize-winning economist Robert Shiller from Harvard made me want to ponder how long this bull market could go on for.
Talking to CNBC, he warned people to save more because returns aren’t going to be great in the future and they certainly won’t be at levels we have become used to. That has relevance for us, as interest rates fall and the dividend yield on our most loved stocks — the banks, Telstra, etc — shrink as we bid up their share prices.
This time is different!
Even more worrying, Shiller says the cyclically adjusted price-earnings ratio is “higher than ever before, except for the times around 1929, 2000, and 2008, all major market peaks.” This measure looks at the market current P/E and compares it to the previous 10 years and has had a good record. But in all of those times mentioned, we did not have interest rates so low and central banks doing what they are doing now.
We are in a post-we-nearly-had-a-depression time period and so, even though I hate saying it, this time it’s different! And I say this because times are crazy and central bank action proves it, as does the level of interest rates.
I think there will be a crash but it will be in the bond market first and it will be if, and when, QE works and Europe starts to grow, Japan starts to grow, China grows OK and the USA keeps recovering. It will mean global growth is on the rise, inflation will start to be expected and interest rates will start to head up.
All of those holding low yield bonds will try to sell them and bond prices will crash.
Our best hope is that the above happens as it will mean that central banks have won, economies are heading back to normalcy and then some years later the stock market will fall over. That’s my perfect story of the future but how realistic is it?
A real outcome
I note Shiller’s points about 1929, 2000 and 2008 but these were the ends of economic booms, interest rates were rising and confidence was elevated. The opposite is the case now, except in the USA, but even there the confidence levels are not high enough to get the Fed to increase interest rates. I think we are in a stretched out slow-growing bull market and that’s why I am confident that we won’t see a market slump this year. We could see a correction, but not a crash, unless something odd and hard to see comes along.
Let’s look at some important issues linked to the bull market to work out just how long we have got in the green and out of the red.
I sometimes look for odd facts to either confirm or deny my optimism and the prediction from PwC and the Economist Intelligence Unit (EIU) that China will surpass the United States as the world’s largest retail market within the next three years I see as a plus for world growth and stocks.
Furthermore, China has 19% of the world’s population and McKinsey says that by 2022 some 75% of the mainland residents will be classified as middle class, compared with just 4% in 2012! That’s huge.
Also, there are other Asian countries growing and their residents seem to love shopping and taking photos with the same gusto as our Chinese friends. Aspirational people drive economies and stock markets, so I love this Asian expansion and middle classification story.
The facts
The expansion of the Asian middle class sets the scene for believing stocks can go up for a while but let’s get some bull market facts:
• The average bull market goes on for about three and a half years and our one started in March 2009, so it’s long in the tooth
• Using the Dow, since 1897 there have been 23 bull markets and only three have been longer than this one
• The longest went for eight years during the Roaring 20s.
• While the Dow has passed its previous all-time high, our market is still about 900 points short of it.
• After the 1990 recession, the market went up nearly 300% before it dived.
The Dow is up about 173% since March 2009, so the Yanks have some climbing room.
This link to a recession in 1990 and a big market comeback has nice parallels for this market as the Yanks called their recession the Great Recession and so we just might get a Great Bull Market.
On the good side, the less excited Wall Street we’ve seen recently is an OK thing for optimists as bull markets often have big rallies ahead of a collapse.
At the same time, charts often warn we should be worried but now most chartists I have talked to are positive on our market in particular.
Signs from the times
I think the Yanks are taking a breather waiting for the economy and companies to catch up to the strong stock buying we saw in the USA in 2014.
The economy there has some conflicting signals but its job creation is a solid positive that helps my optimism.
If 2015 can bring gradual economic improvement in places like Europe, Japan and China, while the US keeps growing over 3% then this bull market runs into 2016.
And if the improvement extends into next year then I think my concern for stocks will be 2017. I will be wary across 2016 but I’m confident about 2015.
Before signing off take note of this little piece of history. The US bull market of the 1920s registered a gain of almost 500% and of course ended in the Great Depression! Our market is not even up 100% yet and because of the world’s central banks keeping interest rates so low, it looks a safe bet to keep on believing in this bull market.
Finally, I loved the news out of Germany and Europe generally on Saturday morning, which bears repeating. “The euro zone economy grew by 0.3% in the December quarter with the German economy growing by 0.7%, both above forecasts, especially German growth. The FTSEurofirst index rose by 0.6% with the German Dax up by 0.4% to record highs and the UK FTSE rose by 0.7%.” (CommSec).
And I loved the spike in mining shares in London with BHP Billiton up by 5% while Rio Tinto gained 3.7%. A better global economy will help mining shares and underpin rising stocks generally.
All of this is good news for bulls and that’s no bull!
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Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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