The Next Bull Market is Behind Our Wall of Worry
Investors are re-experiencing the old phrase, “every bull market climbs a wall of worry” this week. The media continue to bring down expectations and hope for investors. Around the world we read and hear about problems in Europe and slowing growth in Asia and other foreign markets.
But I think this “wall of worry” is blocking investors from seeing the road ahead – and potentially the start of the next bull market.
The bricks in this wall are primarily composed of worries surrounding Europe, it’s economy, and how it might affect the United States. Europe is in a mild recession and its leaders are holding a summit in Brussels to address their banking and economic crisis. But will they come up with an FDIC type plan to protect depositors across the Euro zone? They’ll likely address debt, jobs and growth initiatives, but expectations are low for real meaningful progress. Then there are the concerns over the newly formed Greek government – will it cooperate to the benefit of the nation? Spanish and Italian debt problems certainly make up additional bricks in the wall of worry.
China is a major driver of growth in the world today and another brick in the wall. The Chinese economy has slowed to 7% growth with India close behind at 6%. Though these numbers are slowing, their growth rates are still 2 to 3 times the growth rate in the United States. *
The list of worries and bricks goes on and on. In the US we face the so-called “fiscal cliff” as taxes will automatically rise along with cuts in federal spending in 2013 due to approved prior legislation. This could send our economy over the fiscal cliff! The November elections will be critical to deciding our direction forward.
With all these worries, how can we be in the early stages of a bull market? It appears that an immediate upswing isn’t likely but bull markets are known for three characteristics:
- Economic growth – Recent data supports slow but improving economic growth for the US and continued growth in the emerging markets – particularly Brazil, Russia, India and China.
- Liquidity – Many indicators point to significant cash on the sidelines – corporate balance sheets are generally flush with cash. Among the top 1500 stocks by market cap, there is $1.5 trillion of mostly idle cash! ** This cash will likely be put to use at some point – shareholders will demand it!
- Equity valuations – Stock market valuations look fair versus book values and under valued on the basis of earnings and cash flows according to Calamos Research. Their research also indicates major global markets and US markets look better than average for return prospects.
Additionally the housing market is recovering and interest rates remain extremely low.
The wall of worry is certainly in place and capable of blocking investors from seeing the road ahead. It is also what keeps valuations from being too high. Bull markets do not announce themselves. In August of 1982 the statistics indicated a dismal US economy – the worst unemployment rate since the Great Depression and low growth rates had investors feeling gloomy. But markets are always forward-looking and that same month saw the beginning of a great bull market eventually ending in March of 2000. The growth rate for the S&P 500 Index during that time produced an annualized rate of 19.7%! ** Please keep in mind all performance referenced is historical and is no guarantee of future results, but I think we’re in a similar spot if only we can see past our wall of worry.
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*LPL Research Department
**American Funds Monthly Commentary, June 2012
***Calamos Investment Perspectives, June 2012