The reflationary euphoria that had quickly pushed stocks, the US dollar and bond yields higher following the US election has started to fade recently, as market participants question the new US president’s ability to deliver a great American revival. It is thus all the more important to remember that the key factors sustaining the bull market since 2009 remain in place.
The current bull market began on March 6th, 2009, shortly before the US Federal Reserve’s first full quantitative easing program, and it is likely to continue - regardless of the success quota of new US administration’s economic policies. Below are four key rea-sons:
Macroeconomic policy mix: monetary policy has been the main support pillar for markets and the economy since 2009. Wherever it was deployed in a timely and sufficient manner, monetary easing has consistently offset fiscal austerity, averting fallbacks into recession. Phases of volatility failed to damage or end the bull market. Going forward, central bank policies will remain supportive, while fiscal policy is increasingly coming into play as well. But even where central banks shift toward tightening, they will aim to avoid fully offsetting the prospective fiscal stimulus and/or the positive impact of supply-side reforms.
Economic growth prospects: since the Global Financial Crisis, markets have recovered in line with fundamentals, and are likely to continue to do so. Our two main economic scenarios for the coming years are both benign. They can be summarized as “sluggish progress” (i.e. the status quo since 2009) and “reflationary growth” (i.e. higher growth and inflation levels). Further-more, the forward-looking cyclical indicators are consistently signaling a significant growth pickup for several months now, after bottoming or returning to positive territory during the first half of 2016 (see page 2, charts 3-4).
Reasonable valuations: while some markets and segments may seem expensive, valuations remain clearly below extreme levels. Furthermore, around the world, investors can still find markets that can be considered cheap. Expectations for growth also re-main stable, and reasonable. For many years, analysts have been predicting earnings to generally grow at around 10% for the coming couple of years - plus/minus a couple of percentage points, depending on the index and its sector weights. Nothing has changed in this regard recently. Unless valuations and/or expectations start deviating from their mean in a more extreme manner, investors need not worry too much about a coming bear market.
Positioning/lack of traditional alternatives: this bull market is one of history’s most-unloved. Many private investors have refrained from participating for a variety of reasons, including concerns about economic issues that can remain irrelevant to markets for a very long time (e.g. high government debt levels). Even professional investors continue to hold high cash levels, industry surveys consistently show. These developments imply that the bull market can last for a few or several more years, because there remains a sufficiently large pool of money invested in assets that offer very little or even a negative yield.
Other regions should eventually close performance gap vs. US bull market
The other interesting point concerns relative performance. The past eight years can be characterized as an American bull market. The MSCI USA has surged about 235% from its 2009 low - more than twice as much as the second-best major market index (see page 2, chart 1). One could argue that markets have - at least to some degree - already discounted President Donald Trump’s “Make America Great Again” slogan. The real question could thus be: how much longer will the US continue to outperform?
From a tactical viewpoint, we believe the US will remain among the stronger markets in the near term. But the longer the bullish regime lasts, the more likely it is that other regions will start to catch up. In this context, we are convinced that we are well-prepared for that prospective shift in relative trends, due to our comparatively large neutral positions in Asia-Pacific and the emerging markets (EM). These allocation positions reflect a strategic conviction that we believe will serve our investors well in coming years.
Note: The next LGT Beacon will be published on 8 February 2017.