Take a look at the current flow of financial news and market sentiment. It’s all pretty dismal as far as things go; prices have fallen significantly recently, to the point of some critically-acclaimed investors raising concerns over valuations – with the infamous Carl Icahn to name but one.
Even Allianz’s Mohamed A. El-Erian called a dive lower for equities at the beginning of September. He’d be offside by some five percent on that one at the time of writing, incidentally. Though financial news channels rarely save the ‘bad calls’ for their advertising reels.
Maturity, equity, anxiety?
Anyway, two very important factors that people and investors often seem to forget at the moment is that the equity market is maturing and the alternatives are probably more expensive.
Let’s address the latter first. The trick to good investment is knowing where prices are going – and that’s rarely anything to do with valuations on an absolute basis. Indeed, these things tend to find themselves pegged on a more relative one. Take the bond market; 10-year government paper issued by the G7 nations has rarely been so expensive, with yields at below 2% for many.
To address the former, a maturing equity market brings with it nerves and anxiety. But remember that ‘a healthy market climbs a wall of worry’. Much more common is for the end of a secular bull market* to end on euphoria than on mild panic or pessimism. Worry builds the foundation from which prices can inflate.
A quick note on jargon
To explain the term ‘secular bull market’, let’s establish some market trend terminology. A market trend (a general upward or downward movement over time) is called ‘secular’ for long timeframes of 5 to 25 years, ‘primary’ for medium periods of a few years, and ‘secondary’ for short timeframes of a few months.
A ‘bull market’ is an upward trend and a ‘bear market’ is a downward trend. Why bulls and bears? Most likely because bulls charge onwards and bears retreat to protect themselves.
Therefore a secular bull market is a long-lasting positive increase. And that’s why it makes people happy!
Theories of relativity
To return to equity markets, a much more compelling argument here is the one of relativity. Institutional money managers have liabilities that need matching. That’s how pensions work, essentially.
Forget about white collar-wearing speculators for a minute. We’re talking about the boring, long-only investors with trillions under management and years on their side. They’re looking for yield over the longer term, not at how China might splutter towards the end of this year and into next.
Cue today’s stock market. Given that bonds are expensive and the market is nervous, the one thing investors with short-dated horizons won’t expect is a market rally. And, happily for the bulls, the market is full of surprises.