Are we in a bull run now?

20 May 2013 
SOURCE: Wong Sui Jau
Markets have been moving up over the past few weeks and most are up year-to-date. Are we in a bull run now? It seems very hard to believe when just a few months ago, we were all worrying whether a potential US fiscal cliff would plunge markets into another tumble. Now it is not just the US market which has broken new all time highs, other markets have also broken new highs. It is not necessarily because there has been fantastic news from economic indicators or record breaking earnings reported by companies either. Actually, while an economic recovery is happening in the US, it is still a relatively slow one, and unemployment remains high. And the problems in Europe mean that even if they may have hit bottom and turned the corner, Europe is in for a few more years of pain before it can finally recover from the European debt crisis. So why is the market been going up and is this trend likely to continue?

I think there are two main reasons why the market seems to be defying gravity. Firstly, the valuations of equities are still not that expensive even after this year’s market run to date. The US market, which hit fresh all time high earlier this year, is only trading at 14.8 times 2013 PE ratio. Europe, based on the Stoxx 600 index, is trading at 13.3 times, and Asia as represented by the MSCI Asia ex Japan index is trading at 11.9 times. The Singapore market, which has also hit new highs (though not all time high) is trading at 15.4 times PE.

If we are in a bull run, and sentiment becomes very bullish, then it is not uncommon for markets to reach 20 times PE. Of course, once markets approach those levels, it is certainly be more prudent to take a step back and take some profits. However, in the meantime, markets are not at what I consider an expensive level yet. Bull runs will usually last for at least a year, and often longer. Considering the kind of fears which investors had to deal with last year (European debt crisis, and the US fiscal cliff), I would not classify last year as a bull run at all. Investors only started to feel more positive starting from January this year when the US fiscal cliff was averted. So, there should be at least a few more months, if not easily more than 1 year to go before we are fully into this bull run. In the meantime, the cautious sentiment still prevalent in many investors will continue to give this bull run legs.

Another reason why I still favour equities at this point is because I consider bonds more expensive than equities, and other asset classes like property and gold to be much more expensive at this point. Interest rates are being kept very low by major central banks all over the world to help stimulate their economies. As a result, bonds are rather expensive simply because you are getting paid so little to hold on to a bond. For bonds to make money over what their interest is paying, interest rates have to plunge to even lower. At some point, it is unrealistic to expect interest rates to keep on going down given that they are already so low now. I highlighted why I was cautious on property (including REITs) and gold in my last blog post, so I won’t go into those again.

In comparison, equities actually look the cheapest of these 4 asset classes. This is also because equities are supported by the low interest rates, as well as by corporate earnings. Corporate earnings especially form the foundation to what equities should be valued at. Right now, markets reaching all time highs shouldn’t be so surprising. Earnings of many markets, including Singapore, US, and many parts of Asia, are now actually higher than where they were back in 2007, when markets hit their previous peak. Yet, many markets are only now barely reaching their previous highs, and some, including the Singapore STI index has not yet even reached their 2007 highs. This means that valuations now are lower than where they were back in 2007. Earnings are likely to continue to grow, because the global economy is recovering, it isn’t faltering. This factor, more than anything else, will help to continue to propel stock markets higher.

Actually there is a third reason, but this is purely from a behavioural perspective. The stock markets is very much one of greed and fear. During times of fear, it is cheap and a good time to buy. During time of greed, the stock markets are expensive, and it is time to pull back. 2012 was very much a year of fear, with so much media attention on the European debt crisis and the US fiscal cliff. It will take some time before we move away from this cycle of fear to enter the cycle of greed. There will be some signs when this happens, but I think we are not there yet.

When we hit the cycle of greed, there will be some of these signs like articles being written by analysts to try and justify why markets at high valuations are justifiable. And such phrases like “this time it is different!” or “we are in a new world paradigm” will be used. Except that it is never different. After a market becomes overvalued, and irrational exuberance happens, there will always be a crash sooner or later. Other signs will include everyone, your neighbour, your relatives, your friends, your colleagues, everyone will be getting into the stock market, and furthermore, everyone will be an expert on it. When even the most unlikely people like that retired auntie who has never invested in her whole life starts to give out stock tips, you should get really worried. There will simply be this very bullish sentiment pervading markets, and no one will believe there can be any crash. Usually, this happens the longer the bull run lasts, so if a stock market has been going up for several years, such sentiment is especially prevalent. It is eerily similar to how earlier on, people believe that gold will never drop, and also similar to the current very strong belief by people that property will never lose money too! Both such beliefs are not true, but that so many people believe it shows the very bullish sentiment attached to gold, and property.

Stocks just had a bad down year back in 2011, and last year was very much one of fear. So, it is still early days in a bull run. In fact, outside of us coming out at the start of this year to say we will experience one, and the title of this blog post, I haven’t actually even seen the word being used to describe our stock market in the newspapers. In fact, since I even have to phrase the title as a question mark as opposed to a statement, it shows how uncertain people remain. But I very much believe that the bull market will happen this year and we are in it already. So, kick back and enjoy the ride up! If you are like me, and you are fully invested already, this is simply a time of monitoring, and enjoying seeing your investment rise. If you aren’t fully invested yet, well there is still some time. As I said, it’s still early days. However, as markets continue to rise, then the upside potential will be reduced, so don’t wait too long before investing! Because the last thing you want to do, is to jump in at the time when everyone else has already entered the market, and it is at its top!

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