Beyond some clouds in the short term, the sky remains clear
Eight years of bull market and still counting! Are there reasons to fear the end of the good times? If not, why would the bull market continue? Discover our stance in the short comments below!
A late-stage bull market
Beyond the fact that the current bull market is already more than eight years old, a look at a chart of the MSCI World All Country index clearly shows the presence of characteristic Elliott waves and that we are in the fifth. This is the last wave of any primary trend; in the current instance, it is the one that is considered to be the high conviction part of the bull market (after a first phase that is liquidity driven and a second that is a low conviction bull trend). Fortunately, the fifth wave often can benefit from extensions. We believe that it can keep going for at least three reasons (see here below).
Three reasons for staying bullish over the medium term
The first reason is the prospect of continued earnings growth, given the Goldilocks environment. Indeed, not only is growth synchronous on a worldwide basis but it is based on contributions from consumption, investment spending and trade. This means that sales and earnings remain very well underpinned. We thus see earnings growing at a high single-digit pace in 2018. The second reason relates to the slow pace of monetary policy normalisation that we expect, given that inflationary pressures are building gradually. This implies that liquidity will remain abundant. The third reason is that valuations can still expand. At this stage of the cycle, rich valuations should be expected. The fact that visibility on growth is good and that rates and bond yields are very low in real terms justifies high levels of valuations. We believe that valuations will become more extreme before the end of the bull market.
More hesitancy, finally
November brought tentative signs of entry into a consolidation period. High yield spreads and the volatility index VIX jumped rapidly before undergoing reversals that proved as speedy. The equity market on which these developments were the most visible is Japan, as it was the one with the biggest distance above its 200-day moving average. The likelihood of seeing higher levels of price volatility remains intact. The overbought condition is still present, negative divergences are numerous (proportion of stocks above their 200-day moving average, in the RSI and the MACD) and complacency reigns. With regards to the latter, there have been only 47 occasions since 1990 in which the VIX index of complacency stood below 10; 38 of these occurrences have been observed in 2017! This cannot last indefinitely. We stay neutral in the short term.