In mid-December as the markets were winding down for the Christmas break I observed that as long as fixed-interest rates stayed low, the question for investors was whether the higher yields on offer in the sharemarket should be locked in.
There were easy pickings at that time: quality companies whose shares could be bought on a dividend yield that thrashed fixed interest alternatives.
Steady buying of shares here and overseas since then hasn't totally undermined the yield argument, but the equities rally that began in the middle of last year has made it less compelling.
The Commonwealth bond yield fell from about 6.7 per cent in June 2008 as the global crisis was heading into its cathartic peak to 2.8 per cent in June last year. The S&P/ASX 200 index was sitting just under 4000 points when the bond rate bottomed. It is now just below 5000 points, 25 per cent higher.
The gain since mid-December has been about 8 per cent and shares have rallied around the world over the same time in what has been described as a "risk-off" rally (that is, a rally that occurs when investors decide they do not need such a large risk premium to move their money into shares) - or a "rotational" rally (that is, a weight-of-money rise that occurs as money shifts from bonds into shares, boosting demand for an unchanged supply).
I am still long-term bullish on shares, or at least the ones that are backed by solid business franchises, strong management and conservative balance sheets. It's in my DNA and that of many other investors.
On a total shareholder return measure that combines dividends and capital appreciation, shares are essential components of any balanced investment portfolio.
For investors who saw it coming however, the rally has reached a point where it is now offering profit-taking opportunities. It is once again presenting the risk of capital loss, if Europe's problems flare again as they may well do later this year, or if an economic recovery finally forces interest rates in the northern hemisphere higher again.
One of the simple definitions of a bull market is that it begins after key indices go up by 20 per cent, so on that measure the bull is back in the paddock.
AMP capital strategist Shane Oliver observed this week that if it's real, it could have a way to run. Since World War II, a typical bull market here has pushed the key index up by 126 per cent over a period of almost four years.
As Oliver and others, including Evans and Partners strategist Michael Hawkins, also observe however, valuations are starting to look stretched. Hawkins says that excluding the banks, industrial shares on the ASX bottomed out on a share price-to-earnings ratio of 12.8 times expected earnings in the year ahead in the middle of 2011. After the rally they are now trading at 16.2 times expected earnings in the next year: the multiple has risen sharply because earnings growth itself has been slow - too slow to keep pace with the share price increases.
The high Australian dollar, subdued consumer demand, a softening jobs market and investment inertia are behind the earnings lethargy, which was underlined on Friday by the Reserve Bank's prediction that growth this year would be just 2.5 per cent.
Last May the central bank predicted growth of 3.25 per cent.
As Oliver also noted this week, bull markets typically occur in three stages. The first sees shares that have been beaten down too far rise as dividend yields become too good to ignore, and as hopes of an earnings recovery emerge. The second phase sees less aggressive price-earnings-multiple expansion, but more share price gains as companies deliver earnings growth. In the third toxic phase, investors believe that the boom will last forever and that valuation warnings that have existed for decades can be ignored. They push prices to unsustainable highs, setting up the conditions for a sell-off and the re-emergence of the bear.
Earnings growth will come. Economies don't stay depressed forever. The baton-pass to the earnings phase is now approaching and in its absence, the share prices of quality companies are becoming challenging.
Non-bank industrial shares en masse still offer an earnings yield that comfortably beats the 10-year Commonwealth bond. This bond yield has risen since the middle of last year from 2.8 per cent to about 3.5 per cent. The earnings yield on the non-bank industrial share basket has fallen from 7.8 per cent in mid-2008 to 6.1 per cent.
A dividend yield on the ASX 200 of 4.24 per cent offers less headroom and Hawkins is this week highlighting valuations for top shares that are inviting some profit-taking.
For example, shares in Wesfarmers, which are up almost 5 per cent this year and more than 14 per cent since mid November, are now trading at 18.5 times expected earnings in 2013-14. Ramsay Healthcare shares are up 11 per cent this year, 70 per cent since February last year and are trading on a multiple of 19.3 times expected 2013-2014 earnings.
Telstra shares are up almost 6 per cent this year and 45 per cent since March 20 last year, and are trading at 16.5 times expected earnings in 2013-14.
Boral, whose shares are 15 per cent higher this year and up 71 per cent since mid-2012, is trading on 17.7 times expected 2013-14 earnings. The group is exposed to the US building and construction industry recovery that is under way, but at these prices is being backed to double its profit in two years.
There are plenty of other examples. Westfield is valued at 15.7 times earnings, Brambles is on 16.6 times earnings, CSL is on 21.3 times earnings.
Commonwealth Bank, whose shares are up almost 5 per cent this year and 37 per cent since March last year, is on a 2013-14 multiple of 13.6 times - below many high-quality industrial shares, but out of line with its peer group. NAB is on a 2013-14 earnings multiple of 10.3 times, Westpac is trading on a multiple of 12.1 times and ANZ is trading on a multiple of 12.5 times.
These are all companies that sit well in long-term share investment portfolios. You wouldn't want to sell out of them entirely. However, until earnings growth accelerates, their share prices are pushing the envelope. The whole market could do with a breather in fact: it will be in better condition to move up in the medium term if it gets one.