MARKETS SPECTATOR: Matter over mind

As pullbacks take hold, there has been a lot of doubt in the markets lately. But the price is the thing, and it will vanquish the bears.

In this world of smartphones and instantaneous information, it’s incredibly easy to get caught up in the minutia of day-to-day stock market noise and lose sight of the medium to longer term picture.

I’ve been guilty of this lately so I thought it would be a good chance to take a step back and look at the big picture and where we are in the overall stock market cycle.

Below is a brilliant chart I found which illustrates the stock market cycle perfectly, as well as the underlying sentiment and psychology that dominate the different phases. 

Of course this isn’t an exact science, but from everything that I’ve seen over recent years and in my 16 years of markets experience, my view is that we are somewhere between the disbelief and optimism phases, probably a little closer to the latter.

All bull markets go through the same sort of phases and it’s very clear to me that we are climbing the ‘wall of worry’ at the moment. In fact, one of the reasons I’m firmly in the bullish camp in the medium to long term is the amount of people and headlines that continue to doubt the current rally. You don’t have to look far to find reasons and opinions why the market is overbought, should be going down or is about to crash.

The one thing I’ve come to learn over the years is that the market is just millions and millions of individual opinions manifesting themselves in buy and sell orders. This is the reason why, in my view, price has the final say over anything and everything, no matter what.

There are squillions of different reasons as to why the market could, should or would be lower than where it is right now. But the fact is it's going up right now and no one can argue about the current price. Even if you disagree with it, it is what it is.

More importantly, it is the one thing that controls the success of investments and it is especially effective when it is in direct contrast to popular opinion and sentiment.

This bull market has started like most others in that it has responded to easy money – record amounts in this case – following a big economic downturn. And in all likelihood it will end in the same way with central banks raising interest rates – and it usually takes more than a few rate rises before bull markets come to an end. Given the record lows in rates at the moment, it may take even more rate hikes this time around.

Given the bull market phases that are likely ahead of us, I thought I’d have a look back at the NASDAQ of 2000 just to keep the current rally in perspective and show just what markets could be capable of if things became really euphoric.

 Graph for Click to enlarge

As you can see in the above chart, the NASDAQ Composite is currently 31.4 per cent lower than its 2000 high. Staggeringly, in March 2000 the price-earnings ratio of all NASDAQ stocks was somewhere between 90 and 100.

According to Zacks Investment Research, the NASDAQ is currently trading at a P/E of around 13-times last year’s earnings, 11.5-times 2013 earnings estimates and 10.2-times forecast 2014 earnings.

If the NASDAQ Composite were to double from here, it would still only put it on a P/E ratio of around 25, which is very close to the average of the 10 years preceding 2000.

So this just shows you what markets are capable of during a powerful bull market rally.

Now the hardest part is holding on long enough and then getting out before the next bear market cycle begins.