“Are we there yet?” – the familiar refrain of young children well before the end of a journey might equally be asked by investors as US stocks on Wednesday 22nd August marked (by some measures) the longest bull market in history. As at 31/8/2018, it has been 3,462 days since we last saw a bear market, defined as when stocks lose more than 20% of their value.
This run tops the previous longest bull market of the 1990s (3,452 days) – though the gains of this bull market still lag its 1990s predecessor. Since the S&P 500 hit a low in 9 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.
How have we got here? Two words: quantitative easing (‘Q.E.’). Central 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.
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.
Fundamentals continue to be very supportive. US companies (ex-financials) have record cash on their balance sheet, 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.
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.”
Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.
About the author
Carolyn Bell is an investment manager in the International Equities team, with responsibility for co-managing several funds. She also contributes to the idea generation process for our global equity portfolios. Carolyn joined us in 2014 after 5 years at Baillie Gifford where she worked on the North American equities desk as a generalist with additional sector coverage responsibility for technology and energy. She studied English at the University of Cambridge and has a Masters degree in Early Modern Studies from the University of Aberdeen. She has 10 years’ industry experience*.
*As at 30 June 2018.