You know this already, the stock market is a very strange beast. It goes up and down for barely any reason and it drives most investors crazy. With a sour finish, 2015 brought everybody back to their drawing boards as many “specialists” were talking about the next market crash. After all, we have been riding quite a bull market since 2008 and it’s about time that it ends, right? Well, those who sold in May and went away are missing a very good market over the past 3 months:
Source: ycharts
Sorry for those who predicted a market crash with the Brexit… this lasted only 3-4 days! So what is happening right now? Are we set for another bull market leg? Let’s explore this theory as it is quite boring and repetitive to read about why the market is going to crash, isn’t It?
Companies Show Hope
For about a year, we have been through disappointing quarterly reports containing the classic pessimist words such as challenging economy, headwinds, difficult time, emerging market slowdown, etc. But as of late, companies seem to finally open the door to growth. All right, the graph I’m about to post is a little bit pushy as the growth is only 0.1% and it feels like 10%, but still, it’s a sign the economy is finally heading in the right direction:
Source: FactSet.
As you can see, this is the first jump towards positive territory since the latest quarterly earnings season in April. Currency headwinds it not a big issue anymore as numbers have been fully accounted for over the last year. Now, we can look at cleaner statistics where we don’t have to always compare to currency neutral numbers from the past couple of years.
In Canada, regardless of the oil sand industry tanking, the economy shows resilience and keeps going in the right direction. Surprisingly, the TSX is now up double digits since the beginning of the year. It has almost recovered its latest correction since August 2014:
Source: ycharts
Interest Rates Are Still Very Low
There is no indication that Canada will raise their interest rate in 2016. In fact, it wouldn’t be surprising to not see any interest raises in 2017 either (unless there is an oil boom). This gives lots of room to companies evolving in other industries to restructure their finances, look for expansion through R&D or mergers and acquisitions. When cash is cheap, there is a lot to be done!
The situation is not exactly the same in the U.S. as we already had the first rate increase since 2008 at the end of 2015. Since then, we have been waiting for the next rate increase but there is always a reason to delay this announcement. While the FED is playing hide & seek with the date of its next increase, the whole economy benefits from cheap money. The housing market continues to grow and consumers are relatively confident about the economy. We should see the consumer cyclical sector posting stronger sales as we all have more money in our pockets to spend.
Overall, I don’t see when a strong interest rate hike will come. I’m pretty sure the FED will raise their rate at least once in 2016 but it will be a very slow process to a more reasonable rate. There will be free money in the market for a while. I think the Brexit saga just gave us another year of low interest rates!
There has been a lot of restructuring over the past 2 days
As I follow over 70 companies quarterly in order to update my DSR portfolios, I read many financial statements. Over the past 2 years, I’ve noticed there were several efficiency operations initiated by companies. Since they were facing a challenging economy, they have had to find ways to improve their profit. These companies decided to focus on what they can control in the meantime as they are patiently waiting to see their businesses picking up. But while they focus on their efficiency and post slight EPS increases, their business models show improved margins. Once revenue growth will be back, earnings will even be better than in the past thanks to these improvements. This should lead to another round of earning increases easing the current high valuations. Once this happens, we will have more room for optimism and it is very possible to see another round of bullish years.
The worst is behind for emerging markets
Let’s be honest, the BRIC is has not the hottest place to invest for a few years now. Russia is struggling with low oil prices, Brazil is stuck in the middle of a corruption hole and China is playing around with its numbers to convince the world they are still growing at a fast pace. Since this situation has been going on for a few years now, I think we have the worst of it behind us. Therefore, we should be seeing better news coming from these countries in 2017-2018. The fact that the U.S. economy is growing will also generate jobs across the world. The economic development of these countries is far from over and they are still very much behind industrial countries. This would be the final push to another great bull market.
What do you think? Am I dreaming or I’m forecasting a realistic scenario?
I really believe we will have another bull market at the moment. I think people sitting on the sidelines are making a big mistake as they have been since 2012. The market continues to grow while their money is rotting at very low rates. Don’t be part of the pessimists for once, do something with your money! What do you think; do you think we are heading toward another bull market? I think so.
So many people are saying we are due for a bear market, it’s interesting to see the counterpoint. I don’t think anyone knows. From my analysis, market’s are at fair value right now given ultra low interest rates. That leaves plenty of room for a true bull run into seriously overvalued territory (assuming interest rates remain low).
When you think about it, the market is always incredibly cheaper than 10 years from now 😉 hehehe!
Hey Mike,
Interesting thoughts – thanks for the positivity! It’s difficult to call which way economies & markets will go, so I won’t! But I think these low interest rates are having a negative effect. The US needs to increase its rates a bit, but how can it do so without hurting a lot of people, businesses and companies?
Risk isn’t being priced properly, we shouldn’t go for a long time like this. I think there’s a bigger chance of a price correction than a bull market of increased earnings globally. What will cause a change, either good or bad? Not sure. We’re at extremely high valuations though..either the earnings needs to catch up or the price come down a bit. 🙂
Tristan
keep in mind that earnings have been greatly affected by the US dollar strength as well. I don’t think we are “so over priced” either :-). Anyway, I rather think we will hit another bull market 😉
Very interesting article. Thanks for sharing!
I do think the market still has plenty of room to grow. The economy is growing and jobs are being created which is great.
The thing that I really see that will end the bull is higher interest rates. Companies won’t have access to cheap money… which will effectively bring down corporate earnings. This combined with the fact that other investment vehicles like savings accounts and CDs will look more attractive with higher interest rates, will put a nail in the coffin of the bull market.
I’m not saying that it will be an immediate thing…. it could be a slow gradual process…. which would allow the current bull market time to run.
Either way I’m in the DGI game for the long term, so I will continue to invest in good companies at attractive prices and allow my investments to compound over time.
you get the right attitude, no matter what the market is doing, dividend payments will continue to be made 😉
I believe the market is very expensive right now. I also think that the boomers are dumping so much into the market that the fund managers have to buy something with all the new money. I think this is why the bull is going to continue for quite a while. We will continue to see 10 to 15 percent drops on bad news that quickly reverse.
The thing is once you have determined the market is overvalued, what do you do? do you sell? what is the right valuation for you? do you think we will get a 20% market drop? and, most importantly, when? those are questions I can’t find answers. This is mostly why I rather not bother with them 🙂
Cheers,
Mike
Hi Mike,
I am looking to retire in the next few years so I am very concerned about a very large bear market. I am mostly a DGI but am holding about a third is cash right now. But I do not want it to sit around doing nothing so I am buying deep puts on great companies that I currently own and want more of (AAPL, CVS, CAH,…). The amount I am getting for the puts is at least making up for missed dividends. If the market corrects then I get more stock at the price I like. If the stock drops further (i.e., current put on AAPL at 80), I still get a stock at a price I am happy owning it for. If it goes to 70 I am out some money but have averaged down.
I would think we would have mini pull backs more than a prolonged bear market from the looks of it.
Even strong companies that miss on earnings are not really dropping.
Things I see you have the central banks with lots of money in the stock market.
Other companies are buying stocks in other companies. While that has always gone on I think it’s increased in recent years.
City of Tokyo is a large holder of US equities.
Ok, late on this, but I think, giving that US interest rates appear to be holding, or might even go lower, I think the stock market is at value or even under valued. However, I believe their’s a lot of interest in dividend paying stocks, that may be pushing them a little over valued, so you have be careful….looking for good earnings growth and reasonable payouts (ie. what the Dividend Guy does for us).