MARKETS SPECTATOR: The quiet bull

Fiscal cliffs, austerity, eurozone debt crisis, Grexits ... if you read every headline you'd think 2012 was a disaster for equities. But there's no denying it, we're in a bull market.

When coming back from a break, it’s always nice to return with a blank canvas and be looking at the market with a fresh pair of eyes. Over the festive period, all I saw regarding the market was the inescapable fiscal cliff headlines. I didn’t even read any articles about it.

It’s so easy to get caught up in all the headlines and lose focus of what’s actually happening on markets.

This morning, after a few hours of reading and familiarising myself with what’s been happening across markets, one overriding theme stood out:

We’re in a bull market, along with most other global markets. There’s simply no denying it!

Below is a table showing last year’s returns. You simply don’t see these kinds of returns outside of a bull market.

image
Source: Iress

If you were to ask Joe Bloggs on the street how they thought the major European equity markets performed last year, there’s no way they would have said gains of 29 per cent and 15 per cent for the German and French markets respectively.

Ask yourself this; how many times have you seen the headline ‘S&P/ASX 200 index rises 14.6 per cent in 2012’ versus ‘$15 billion wiped from the Australian market’?

This just goes to show how huge the difference can be between the perception created by mainstream media of what is happening versus what is actually happening on a markets level.

Sensationalism sells and unfortunately a lot of the time that means focusing on the negative and ‘where the next crash’ will come from. This is absolutely fine but my advice is to keep it balanced by combining opinion with what is actually happening.

A couple of old adages sum it up perfectly: ‘the market is always right’ and ‘the market can stay irrational a lot longer than you can stay solvent’.

Now that the fiscal cliff is basically done and dusted everyone has moved onto the US debt ceiling and why and how this will completely derail the bull market we’re seeing across global equity markets.

If the market wants to go up, it will go up, irrespective of the events and headlines. Especially during the early phases of bull markets, and even more so given the volatility and tumultuous ride over the last five years, there will always be negatives that ‘could’ be the turning point. In market talk, it’s referred to as ‘climbing the wall of worry’.

I don’t think there has ever been a better example than the fiscal cliff drama of the last two to three months. If there was ever a point when equities markets could and should have fallen over it was during this period. Yet, since President Obama’s re-election on November 7, 2012 the S&P 500 is up 5.2 per cent.

So looking forward to 2013, if you can’t tell I’m pretty bullish. Sometimes you’ve got to look at the investment game a little differently, or even simplistically, and that’s what I try to do.

Most simply, markets are all about supply and demand. If there is more buying volume than selling volume, markets will go up and vice versa. At the moment, we’re seeing more buying volume than selling, hence the recent performance.

From a macro perspective, we’re somewhere in the ‘grow on scepticism’/early bull stage of the market cycle, as you can see by the red circle marked on the chart below.

image

For the market to reverse and begin going meaningfully lower, we would need to a see a significant change in the underlying market structure so that there was more selling volume than buying. At this stage of the cycle, outside of normal bouts of profit taking I simply can’t see where this overwhelming amount of selling would come from.

If money wanted to exit equities, it did so years ago during the depth of the GFC (market lows). Globally, there has never been more money on the sidelines (due to people selling equities during the GFC) or in perceived safe haven assets like precious metals, cash and bonds.

Money is already beginning to trickle out of these assets classes and into equities as overall risk appetite continues to improve and investors are forced to chase some sort of yield given the extremely low yields on both cash and bonds.

As more and more buyers return to equity markets, optimism and confidence will continue to improve, driving the market higher and into the middle stages of the bull market cycle.

Related Articles