So, believe it or not, we’re now in the longest running equity bull market in history (it has been 3,454 days since we last saw a bear market). Excited, or looking for the exit? Some investors will be looking at their portfolios and wondering whether now is the time for last orders. Certainly there is evidence – albeit anecdotal – that some of the bigger players in the market are getting a touch nervous. There are rumors, for example, that the infamous Saudi Aramco IPO has been put on ice. Should you be looking to pack up too?
We spoke to Carolyn Bell, investment manager with the equities team at Kames Capital, about her views on the current bull run.
AT: Is this really the longest bull market in history?
CB: This run tops the previous longest bull market of the 1990s – though the gains of this bull market still lag its 1990s predecessor. Since the S&P 500 hit a low in March 2009, the market has risen by more than 300%. Those who ignored the pessimists and bought when others were fearful have made large gains.
The ‘longest bull market’ appellation is largely symbolic (it certainly doesn’t mean the market is expensive, or poised to fall), but it is probably a good point to take stock.
AT: So how did we get here?
CB: Two words: quantitative easing (‘Q.E.’). National banks have supported economies and asset values by pushing money into world markets, and by doing so they have made large strides in improving consumer balance sheets in many regions. This has been at the cost of weakening national balance sheets – US debt/GDP has more than doubled from its relatively healthy 40% level in 2007, pre-Global Financial Crisis – but this is with the promise of investing for growth. Q.E. is being dialled back, which US equity investors have generally taken to be positive – an indicator that the US economy, and possibly the global economy, is ready to be weaned off its reliance on central bank funding. In a true oddity, the S&P 500 was up every month of last year – the first time ever. Among the other hats he wears, Trump is Mr Deregulation – the markets have voted accordingly.
AT: Is the US equity market starting to look ‘toppy’ now?
Bull markets end when such confidence becomes over-exuberant, generating imbalances and egregious valuations. We are not there yet. Capex levels are still modest, though rising, and equity risk premiums around 5% are still generous. The S&P 500 trades on a 16.6x price/earnings ratio, with a FCF yield of 5.2% and a dividend yield of 2%. While the US may seem expensive relative to other markets, it is not expensive relative to its own trading history.
AT: What about the fundamentals?
Fundamentals continue to be very supportive. US companies (ex-financials) have record cash on their balance sheets, close to $1,400bn in aggregate at the end of 2017 versus $600bn approximately in 2008. The growth of the technology sector in particular has improved the cash-generating capabilities of the entire US market. So much cash suggests more M&A, more reasons for the market to rise. The latter stages of a bull market can sometimes be the most rewarding.
AT: What are the key risks you are seeing?
The key risk we see is political. From trade tensions to the populist rise (again!) in Europe and with the recent turmoil in Turkey signalling fragility in some emerging market corners, political risk has certainly taken more centre stage this year than in low volatility 2017. To pursue an aggressive isolationist policy for much longer would certainly be an own goal for Trump. The base expectation has to be that he is using strong-arm tactics as a means of negotiation. Business, and markets, like political stability.