What is a Bull Market 2009 – ?

Thursday, June 5, 2014

It is the nature of the market to confound as many participants as possible. So what is a Bull Market in 2014 onwards going to look like?

We often read about the money habits of people who endured the Great Depression. The indelible stain of being wiped out financially leaves a scar that takes at least one generation to wash out. It is therefore interesting to see history repeat with the spending or non-spending habits of the millennials.

One thesis is that investors are now conditioned to overweight the negative so as to NEVER repeat the experience of 2008 – which paradoxically could be driving markets higher. Many market participants sold out of equities at the nadir of the 2008/09 bottom only to return, if at all, 4 years later once the S&P 500 had more than doubled.

Consider this:

– We are now 5 years into a cyclical bull market that by all normal measures is long in the tooth. The average historical equity bull market duration is approximately 4 years.

– The Case-Schiller S&P500 trailing price earnings ratio is 19 which is nearer the richer end of the spectrum. Corporate profit margins are at all-time highs, but earnings aren’t growing. The S&P 500 is rising on multiple expansion.

– Gross Domestic Product (GDP) / Market Capitalization – one of Warren Buffet’s favorite indicators – is at 142% indicates that the market is overvalued. 200% is rich, 90% is cheap.

– The 4 year Presidential cycle has indicated lower markets in 2014 – as has the January barometer.

– The macro picture is not encouraging – China debt, Russia, Crimea

Investors are quick to cite the reasons why a market correction is imminent yet the market continues marching higher!

One possible scenario…

The glacial market action of 2014 could continue for a while yet, proving the short-term bears wrong and at the same time doing very little to increase the wealth of the bulls. It’s a possibility because that type of performance would be counter to the expectations of the greatest number of market participants. But the market seems to be in a slow topping process. We can see this from the rotation from risky to safe assets e.g. high yield underperforming investment grade or Russell 2000 (small caps) under performing large caps.

Given the current sentiment, a 10% shakeout is possible but could be followed by a quick return to the highs shortly thereafter. What is yet beyond the horizon may require our utmost vigilance.

Greg Silberman CFA®, CAIA, CA(SA)

Chief Investment Officer

Advisory Services offered through Atlanta Capital Group.

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