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#Market Strategy — 26.09.2018

The Longest Bull Market Ever, With No End In Sight?

Roger Keller

On 22 August, the current bull market, which started in March 2009, became the longest on record. Given that we are also in the second-longest phase of US economic expansion since 1945, the question on everyone lips is: how long will the bull market last?

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3,487 days and counting

The current bull market began on 9 March 2009. Just under a decade later, on 22 August, it became the longest ever. The previous record for the longest bull run in history was between October 1990 and March 2000. Of course, the question arises, how long will this bull market last? Valuations are no longer cheap, the world’s dollar monetary base has contracted for the eighth time since 1971 (turbulence followed the previous seven occasions) and US retail investors’ allocation to stocks is at its highest since the dot-com bubble. Although the list of troublesome factors is quite long, we still maintain our positive fundamental opinion for the next 9 to 12 months, assuming a small negative impact from protectionism and a limited rise in bond yields.

The sales and earnings growth outlook stays favourable

The diffusion index of leading indicators has recently rebounded. Economic prospects remain good despite the moderation in global trade and trade tensions.Particularly encouraging are the trends in capital expenditure and the slow tightening of monetary conditions. Hence, global sales growth should be solid and, coupled with limited threats to margins in the US and room for margin expansion elsewhere, the outlook for earnings remains promising. On a global basis, we see earnings growth moderating from nearly 16% this year to high single-digits in 2019, so an above-average pace of expansion is on the cards. 

Valuations are not a constraint

At the start of the bull market in 2009, the 12-month forward PE stood below 10 on global equities and the price-to-book was 1.2. Now, they are at 14.6 and 2.2 respectively. Both measures are hovering around long-term averages. Looking at the equity risk premium, equities appear cheap, which is logical because bonds are expensive. On dividend yields, equities remain attractive, at least outside the US where even yields on bonds with short maturities are back above the S&P 500 dividend yield. So overall, valuations are not a constraint. 

A more dangerous phase

With global growth and central bank liquidity peaking in 2018, the global composite PMI and economic surprises having no direction, valuations providing less of a cushion, not to mention the worrisome US yield curve and numerous political risks (trade tensions, US government shutdown, Italian budget, Brexit, etc.), investors have many reasons to question their equity exposure. The most cautious among them might wish to reduce their exposure. Others should be prepared for periods of heightened volatility and turn more selective, with a focus on the medium-term upside.

The bottom line

In our view the end of the bull market is not yet on the horizon, given our expectation that the global economic expansion is not over, implying a continued rise in earnings. Valuations are not a constraint.