It’s popular for people to call the current rally in stocks a hated bull market because analysts and investors will tell you that they are bearish.However, this is exactly what bull markets are all about according to Richard Bernstein of RBA LLC.
“Investors have the impression that bull markets are days of wine and roses,” writes Bernstein in a new white paper. “However, nothing could be farther from the truth. Bull markets are periods of fear. This becomes quite obvious when one examines the valuation and sentiment data associated with the 1982, 1990, 1995, and 2003 bull markets.”
Pointing to the current bull market, he notes that fear is high and equity valuations are reasonable, especially relative to Treasuries.
Furthermore, despite the enormous returns in the stock market since the beginning of the current bull market, they seem to be in line with previous bull markets. From Bernstein’s note:
The bull market in US equities is now 40-one months old (March 2009 through July 2012), and Chart 4 compares the performance so far during the current bull market with the performance during previous bull markets’ first 40-one months. The current cycle’s performance fits well with history, and is in the middle of past cycles’ performances.
Photo: Richard Bernstein Advisors
The good news is that the current bull market may still be in its infancy stage. From Bernstein:
Bull markets typically end when valuations are extreme, the Fed is tightening monetary policy, and investors are over-enthusiastic about potential equity returns. Valuations are quite attractive given that the 10-year t-note yields roughly 1.5%. Investors are very leery of equities, and equities are no longer the asset class of choice. The Fed is considering easing further, and a tightening of monetary policy seems far into the future.
The opportunity cost of fear has been very high. Both institutional and individual investors have largely missed out on a doubling of the US equity market. If this cycle continues to follow historical precedent, as it has done so far, then investors will eventually try to play catch-up, and fund flows will likely turn decidedly positive.
The bull market seems to be a very typical one and, like past cycles, is based on fear. This bull run may still be in its early stages despite being 40-one months old.
Download Bernstein’s white paper at RBA-LLC.com.
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