In February we experienced near 10% pull back in all major indices. The return of volatility in the equities market have dampened investors’ sentiment and overall optimism in future market performance. The questions being asked over and again is – are we at the end of the current secular bull market?
We address this question in two ways. First, we analyze the current economic conditions including our forecast in GDP growth, business confidence and employment conditions amongst other barometers for the overall economy. Second, same as purchasing a home, we assess the reasonableness of current market pricing for global equities.
For 2018, RBC Global Asset Management forecast global GDP growth at 4.0% which is the fastest growth since the Financial Crisis in 2008. Even though our economists’ forecast is slightly higher than the street consensus, a synchronized global recovery and faster growth is forecasted by all major financial firms. While the recovery and faster economic growth are not in dispute as the market is always forward looking, the remaining time of the current growth period is of concern for most market participants.
Most economists put the current economic cycle in the U.S. at between mid to late stage of the cycle. The reason we put so much emphasis on the stage of the cycle is to assess the probability of a recession. For the past 100 years, all except for 2 bear markets took place as recession took reign of the overall economy.
Here is our break-down and analysis of the current U.S. economic cycle:
U.S. Business cycle scorecard
From a multi-factored analysis of various economic indicators that are most reliable in assessing the stage of the economic cycle, most votes fall under Mid to Late cycle under the current economic conditions. While it is a blunt measurement tool, the team put the likelihood of a 2019 recession at 30%.
Just how expensive are stocks? Once again we go back to the fundamentals. The two driving factors for the equities market are: valuation multiples (P/E is the most commonly used) and earnings growth. Due to the decades low interest rate environment, P/E multiples have expanded to an elevated level. The current P/E ratio of 23x is at one standard deviation higher than the equilibrium 19x P/E. This means the market is more vulnerable to investors’ sentiment than ever. On the other hand, corporate earnings growth have been impressive. In the U.S. corporate profit rose 15% last year and the expected growth for 2018 is 19% including the benefit of proposed corporate tax cut. If we apply the normalized P/E multiple of 19x, we still see potentially attractive upside in the current market.
Earnings estimates and alternative scenarios for valuations and outcomes for the S&P 500 Index
The world equities markets have performed remarkably well in the last year. Near 20% return was achieved in the U.S., parts of Europe and Japan. We are now nine years into the current secular bull market in the U.S. and questions are asked about the remaining time left. While it is folly to try and predict the future, we can offer a historical view as a reference point to address investors’ concerns.
U.S. Secular Bull Markets 1870 - 2018
Through examining the historical performance and past secular bull markets for S&P 500 from 1870 to the present day, the average length of secular bull market is sixteen years. If we are truly in the midst of a secular bull market, the current market would have potential for future growth.
Rita Li works with high net worth individuals and families to provide a high touch service in holistic wealth management planning. Her team encompasses professionals with in-depth taxation and legal backgrounds, together, they strive to deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with expertise in asset management. Rita obtained her MBA from Richard Ivey School of Business. Contact Rita for a complimentary consultation to determine whether the services she provides can be the right fit for you and your family.