Stocktake: How far can the bull run?

Tue, Jan 14, 2014, 01:03

Analysts are projecting, on average, gains of just 5.8 per cent this year for the S&P 500, Bloomberg noted last week – the weakest annual target in eight years. However, market strategist Ed Yardeni reckons the bull market has some juice left in the tank, saying the so-called “great rotation” out of bonds and into stocks is in its early stages.

He notes that bond funds attracted $1,372 billion in net inflows between 2009 and 2012, but suffered $111 billion in outflows between June and November. Indeed, the aforementioned AAII poll shows bond allocations have only just fallen below their historical average, having been higher for the previous 54 months.

Buybacks of company shares have supported indices in recent years. If buybacks remain strong, and the rotation into shares builds momentum, says Yardeni, there is potential for a market “melt-up”.



Investors pile in five years after bottom
Ordinary investors have been suspicious of the US bull market for most of the past five years. Now, however, on the back of last year’s 30 per cent gain and a near tripling in share prices since 2009, they are belatedly getting into the party mood.

The latest American Association of Individual Investors (AAII) poll shows that equity allocations have shot up to 68 per cent – which is well above historical averages (60 per cent) and the highest since July 2007, prior to the banking crash.

Cash levels have fallen to 16.5 per cent –which is well below historical norms (24 per cent).

The current reading is high, though not alarmingly so – equity allocations hit 77 per cent at the market peak in 2000, and were near 70 per cent many times between 2004 and 2007. It indicates, however, a return of animal spirits.

Sceptical investors, burned by two bear markets inside a decade, shied away from equities until last year when allocations began to creep up again.

It also confirms ordinary investors’ reputation as awful market timers. Allocations plunged to near 40 per cent at the March 2009 bottom, when valuations hit multi-decade lows.

Only now are investors getting excited, at a time when equities look decidedly pricey.

Nuveen strategist Bob Doll noted last week that investors earned an average of just 2.1 per cent over the last 20 years – below inflation, and nowhere near bonds (6.5 per cent) and equities (7.8 per cent). Little wonder, given their “buy high, sell low” strategy.


Where to find emerging value
Sentiment towards emerging market equities turned ugly last year and Goldman Sachs last week warned further “significant underperformance” lies in store. For value investors, however, some emerging market stocks may be a fine long-term bet.

Macro nerves have seen fund managers pack emerging market portfolios with defensive safe-haven stocks. According to Alliance Bernstein, nearly half of emerging market equity assets are in defensive stocks that trade at a premium to the market of 20 per cent or higher. As a result, cyclically sensitive stocks trade at “some of the deepest discounts versus the overall emerging market market in more than 15 years – and are extraordinarily cheap versus low-beta, defensive stocks, which trade near record premiums”.

The analysts note that the cheapest quintile of emerging market stocks has have outperformed the most expensive by 7.5 per cent annually since 1992. Investors have overplayed the safety card; “a rebalance to value is in order”.


Get ready for the reports
US earnings season has begun, and investors will be looking for decent results to support last year’s big gains.

LPL Research thinks they will get just that. The firm expects stronger guidance as companies cite an improved economy and improved visibility, and notes that the ISM Purchasing Managers’ Index, which has a “solid track record” in forecasting earnings growth, indicates a rebound in earnings and revenues. Additionally, some 40 per cent of S&P 500 company profits come from global sources, and it expects better non-US revenues.

Although earnings season can be jittery, it tends to be profitable; LPL says that over the last four years, all S&P 500 gains have come in the six-week period that runs from two weeks before to four weeks after the first reports. The remaining seven weeks in each quarter, in contrast, have contributed nothing but volatility.


Why ugly CEOs aren’t worth it
Better-looking chief executives boost stock prices, according to a new study.

The study, Beauty is Wealth: CEO Appearance and Shareholder Value, used a website called anaface.com to assess the “facial geometry” of 677 chief executives. The lookers were paid more money, enjoyed enhanced stock returns during their first days of work, were likely to enjoy a better reception from investors when they announced acquisitions, and saw better stock returns when they appeared on television. “More attractive CEOs receive higher compensation for a reason,” the paper concluded. “They create value for shareholders through better negotiating power and visibility.”

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