Are we in a Secular Equity Bull Market?

In last week’s note entitled Voting Machine we mentioned that, in our opinion, equity markets were experiencing an intermediate correction which, if history proved any guide, could end around the 20-month moving average which is currently 1750 on the S&P 500.

Thereafter we highlighted 3 possible scenarios:-

1) a retest of the highs and then another more significant down leg;
2) a minor bounce from 1750 then another more rapid down leg or;
3) the next bull move higher

We recently came across a good analysis by Dan Wantrobski, Managing Director of Technical Strategy at Janney Capital Markets which explores option 3. Dan cites a number of reasons to believe we are now immersed in a secular bull market in equities, here are a few of his points:

  1. Valuations: Although not at traditional bear market lows, the current 12 month trailing S&P 500 P/E ratio of 19 is well off its 2000 highs of 43 (GS: pundits cite the low interest rate environment for an artificially high P/E). The ratio made a low of approximately 11 during the 2008 crash creating some precedent for a bear market low.
  2. Demographics: According to generally accepted demographic classifications and official government data, the Millennials are actually larger than the Baby Boomers. Furthermore, this demographic has not even reached the age of 30 yet. This means that the Millennials most productive working years lie ahead which is bullish for equities and value creation.
  3. Credit Cycle as a Secular Driver: Post 2008 financial crisis US Households have been steadily reducing their overall debt burden (GS: and the government commensurately increasing). The rationale here is that households are in better shape to increase consumption in future years.
  4. Supply of equities v potential demand: [GS: probably the most convincing argument]. There are a number of reasons to believe that demand for equities will outstrip supply over the next 5 to 10 years they are:

 a.The number of US listed equities is now lower (approximately 5,000) as compared to the 1970s and 80s. This may be attributable to higher IPO & compliance costs causing companies to stay private for longer. [Fewer] equities will continue to receive an allocation from retirement plans and other market participants.

 b.Although stock buybacks are at record levels ($477B in 2013), the ratio of buybacks to corporate cash balances remains fairly low at 3.8x (GS: the pundits will cite low borrowing costs and lack of investment opportunities as to  why stock buybacks are so high).

c. Overall equity trading volume remains low post 2008 despite a 147% increase in the S&P 500. Sideline buying power potential + Low volume bull market = plenty of upside left and perhaps even a violent upward move in equities.

Dan cites some interesting and plausible reasons as to why this secular Bull market in equities has some legs. A chart package of Dan’s work can be found here: http://www.financialsense.com/sites/default/files/janney-market-map.pdf

The above factors constitute the Weighing Machine as opposed to the Voting Machine. Strong trends such as demographics, valuations and cash on the balance sheet take time to play out but are dominant forces that will ultimately have an impact on security prices.

Best Regards

Greg
Greg Silberman CFA®, CAIA, CA(SA)

Chief Investment Officer
www.atlantacapitalgroup.com

 Advisory Services offered through Atlanta Capital Group.

Securities offered through Triad Advisors, Member FINRA / SIPC.

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