Happy First Anniversary… to the “Unloved” Bull Market & Global Earnings Recovery
About one year ago stock prices began their ascent from the 15 month “funk” that began in the summer of 2015. As you may recall, China’s growth slowed during that time and global corporate profits took a tumble sending global stock indexes down nearly 20% in the summer, and once again into the first quarter of 2016. It was the first time since 2008 that stock indexes were negative for more than a year, once again testing investor’s patience. However, since last summer, we have witnessed a powerful rally in global stock prices that rivals some of history’s best one year advances, all in the face of above average doubt and general unacceptance from the average investor, the media and many institutional investors. Why is this market recovery so untrusted and unloved?
We can understand why most investors questioned the viability of rising stock prices last year, given that it coincided with the surprising (to most) election of Mr. Trump. The initial rise in stock prices, referred to last fall as the “Trump Bump,” has seemed to take on a life of its own despite Trump’s inability to get anything done on Capitol Hill. Today’s doubters are understandably underinvested and paying dearly for it. Years like these don’t come often. If history is a guide these doubters will eventually capitulate and embrace the steady rise in stock prices for one main reason: the recovering business cycle and increasing corporate profits support higher stock prices.
Though the earnings recession and market decline of 2015-16 was unusually mild, it did constitute a bear market and recession in our book. This very well may be another point of confusion for the average “doubting” investor who thinks that this bull market started in 2009 and is the longest bull market in history. The doubters need to recognize that the prior bull market ended at the 2016 low and we are at the beginning of a new business cycle and not the end of an aging one. One can simply look at the impressive and broad recovery in earnings growth across all economically sensitive sectors and almost all regions of the globe – it’s the real deal and it’s a great time for you to be a global investor.
Lastly, we would like to point out that although Dow 22,000 sounds high, it is not overpriced relative to earnings. Moreover, foreign markets are even less expensive relative to earnings. As global corporate profits continue to advance, markets will support even higher stock prices and a higher Dow Jones Index than one might imagine. Of course, as markets continue upward the doubters will, over time, become more fully invested – which in turn will drive stock prices higher. Nothing lasts forever, but we would suggest that we are at the early stages of better times to come. The first year of business cycle recoveries typically result in big stock market gains (just like this one) and in subsequent years returns normalize in the 8-12% range, hence the importance of being involved early.
Though we are optimistic, we do expect normal 8-10% corrections along the way upward. Investors haven’t seen one of those in over a year and should prepare themselves for the likelihood of a return to more normal volatility. Additionally, we want you to know that within our optimistic view, we are very aware that we are dealing with the unknown and that it is a risky world. Therefore, we continue to employ our Active Risk Management tools such as a flexible approach to your portfolio’s asset allocation, sector management and the careful placement of stop loss orders on the economically sensitive areas of your stock portfolio.
We hope you find this update helpful. If you have experienced any significant change in your financial circumstances or would like to discuss your portfolio please let us know. As always, if you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.
Your Team at Main Street Research