SHANE OLIVER: The bull market for global stocks has a long way to run yet

Photo by Ander Gillenea/Getty Images

Stocks around the world are elevated, particularly in the US.

The S&P 500 has now been a cyclical bull market for close to eight years, the second-longest run since the end of World War 2, adding a mammoth 239% in the process. Global stocks have also performed well over the same period, adding 167% from GFC lows.

And now Donald Trump is in the White House, helping to fuel optimism among investors — at least until recently — that his free-spending fiscal plans and push towards financial deregulation will power the US economy to a purple-patch along with the stock market.

US S&P 500 Monthly Chart

At the same time, bonds have been selling off — leading some to question whether the multi-decade bull market is now over — and inflation is starting to increase. And the US Fed has pencilled in three interest rate hikes this year, with many more to come.

To some, that simply reflects optimism that better times for the economy, and stocks, lie ahead.

Others who have seen ultra-loose monetary policy power stocks to astronomical levels are starting to question whether the bull market may be coming to an end.

Cut off the lifeblood of a bull market — incredibly low borrowing costs — and it may quickly become a bear. Throw in nervousness that Trump may not be able to deliver on his pre-election promises, along with the threat of increased geopolitical risk, and it’s little wonder stocks around the world have been wavering of late.

After such a strong run, some investors are becoming nervous.

Don’t be, says Shane Oliver, chief economist at AMP Capital in Sydney. The bull run for stocks, in his opinion, has a long way to run yet.

Pointing to the chart below, he says that we’re currently in the sweet-spot for stocks in the current economic cycle — a period where the economy is recovering but inflation is not yet a threat.

In a typical bull market, Oliver says it has a tendency to have three distinct phases: investor scepticism, optimism and euphoria.

“Scepticism normally starts when economic conditions are still weak and confidence is poor, but smart investors start to see value in shares helped by ultra easy monetary conditions, low interest rates and low bond yields,” says Oliver.

And, on the optimism phase, he says it is driven by strengthening profits as economic growth turns up and investor scepticism gives way to optimism.

“While monetary policy may start to tighten, it is from very easy conditions and will remain easy as inflation remains low. Therefore, bond yields may drift higher but not enough to derail the cyclical bull market in shares,” he says.

In the final phase — investor euphoria — Oliver says stocks are pushed into overvalued territory by strong economic growth and profit conditions, leading to “signs of economic excess” such as over-investment, full capacity utilisation, surging private sector debt, high and surging inflation which forces central banks to lift interest rates aggressively.

“The combination of overvaluation, investors being fully loaded up on shares and tight monetary policy sets the scene for a new bear market,” he says.

“Bull markets do not die of old age but of exhaustion,” he adds.

So, after such a stellar run, particularly after the election of Trump helped push US stocks to fresh record highs and put a rocket under other markets around the world, many are questioning whether we’re still in the optimism phase, or witnessing euphoria.

Although some of the price action over the past three months looked euphoric, Oliver suggests there are few signs we’ve entered that stage yet, noting that monetary policy globally remains very loose, the recent acceleration in inflation has been driven by the oil price recovery and that stock valuations are OK, although they are no longer cheap.

He also says there are few signs of economic excesses forming with the exception of corporate debt in China and the US.

And, despite what some may deem to be euphoric levels of investor sentiment, he thinks current investor positioning — backing up that optimism — is not stretched, pointing out that huge investor flows into bond funds over the last few years have yet to reverse in favour of shares.

“We are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and share market peaks,” says Oliver.

“So barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go — particularly if global economic growth returns to more normal levels which in turn will help earnings.”

Oliver believes that while corrections should be expected within the current bull market — pointing specifically to risks attached to Trump’s presidency and upcoming European elections — we’re still a long way from the peak in the investment cycle.

And, with other advanced economies less advanced in the economic cycle than the United States, he says that stocks in other markets such as Japan and Europe “provide opportunities for investors”.

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