End of a bull market, or nowhere near?

This article first appeared in The Edge Financial Daily, on February 8, 2018.
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IT is safe to say 2018’s euphoric stage is over. Almost US$3 trillion (RM11.73 trillion) was erased from equity values in six days, volatility surged, and the best start to a year in three decades was wiped out. Now what?

Buy, sell or hold — simple choices, never easy. Is the bull run too old? Should I buy the dip? What about valuations? Following is a breakdown of the bull and bear case for five different topics, from earnings to sentiment to bond yields.


The Bear Case: Equities are pricey. Just this weekend, former US Federal Reserve chair Janet Yellen said that US stocks are “high,” with price-earnings ratios near the upper end of their historical ranges. S&P 500 companies trade for nearly 23 times profit, a ratio that has only been matched once since the dot-com bubble. The last time this kind of level was seen was in the aftermath of the financial crisis, where earnings were essentially non-existent.

The Bull Case: Earnings are looking good — really good. The market is in the midst of one of the best rounds of corporate earnings upgrades for S&P 500 companies on record. In sum, estimates for 2018 profits have increased by more than US$10 a share since mid-December, a pace four times faster than any stretch seen since at least 2012, according to data compiled by Bloomberg.

If you measure using those estimates, valuations do not look as lofty — factor in 2018 estimates and stocks trade at a multiple of 17.7. If you extend to 2019 forecasts, the price-earnings ratio comes down to a healthy 16.


The Bear Case: Consumers are feeling good, possibly too good. A whiff of euphoria crept into stocks during one of the strongest starts to a year on record, with cash pouring in at unprecedented rates. The percentage of people who expect the stock market to climb is the highest on record, often an indicator that a market top is near. The last time optimism approached this level was in early 2000.

The Bull Case: Consumer confidence, which measures people’s optimism about the economy’s well-being, is hovering near the highest level in 17 years, stoking optimism that the motor of the economy is humming. That should translate into higher corporate earnings and give the market room to run.

The economy 

The Bull Case: Virtually everywhere you look, the world’s largest economy, already in its third-longest expansion on record, is showing signs of picking up steam. Unemployment is hovering around historically low levels, manufacturing is on the rise and consumer spending is higher. And it is not just at home. Global growth is synchronised to an extent not seen in more than a decade and should power markets higher.

The Bear Case: A stronger US economy could breed inflation and force the Fed to raise rates fast enough to inhibit growth rates. Consistent strength in key economic indicators supports the Fed’s case for more hikes, which would raise borrowing costs for companies and consumers, making it more expensive to buy a house and harder to pay off credit cards. That ultimately can slow down the economy and result in a recession — which is what analysts cite as the most likely catalyst for the end of the bull market.

Bond yields 

The Bear Case: If yields keep climbing, fixed income is going to start looking more enticing than the equity market. Since the financial crisis, equities have been relatively more attractive, with higher “yields” than bonds. But as Treasury rates inch up, the gap in potential rewards to reap narrows. The spread between bond yields and equity profits has shrunk to the smallest in eight years, risking a tipping point where buyers could become more inclined to put money into the fixed income market.

The Bull Case: Rates are going up in response to strong economic growth, which doesn’t have to be a bad thing.

“As the economy is normalising, rates should normalise, too,” Brad McMillan, chief investment officer for Commonwealth Financial Network, said by phone. “And what we’ve seen so far is rates starting to creep back into normal zones. If we can actually get rates back to where they should be, maybe we’ll be back to a normal economy in a few years. And that’s been the goal of public policy for the past 10 years.”


The Bear Case: The rally has run long enough. This equity advance is now seven months from being the longest on record, signalling that a slowdown — or even a reversal of course — is on the horizon.

The Bull Case: Essentially, the bulls will keep running. Even with a pullback, like the one that’s spread across the beginning of this month, people are not likely to pull their money out of the equity market.

“Investors, for the most part, haven’t been stirred by the equity slump,” Chris Harvey, head of equity strategy at Wells Fargo, wrote in a note to clients. “Our take is that the fear among clients remains very low. Over the last 12-24 months, market participants have been conditioned not to sell the dip.” — Bloomberg