The staggering run off the market of the March lows has surprised almost everybody, including market veterans, as we experienced one of the shortest bear markets in history after a stunning 35% drop in less than a month. With all of the indexes at or near all-time highs, and with the economy crawling back to some semblance of its pre-COVID-19 luster, is it possible that there is still room to run for what seems like a tired bull?
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In fact, there are some who think just that, despite the howls of the bears that tout another crash right around the corner. Peter Oppenheimer from Goldman Sachs Global Strategy team is out with a new research piece listing 10 separate reasons that the bull market has further to run.
Note that Oppenheimer’s report says right up front that the huge rise from the March lows and a massively large bullish options positioning makes us ripe for a near-term setback, one that may have started late last week.
With that caveat in mind, they present these 10 top reasons while the bull market run can go higher:
1) We are in the first phase of a new investment cycle, following a deep recession. The ‘Hope’ phase – the first part of a new cycle, which usually begins in a recession as investors start to anticipate a recovery, is typically the strongest part of the cycle. That is what we have been seeing this year.
2) The economic recovery looks more durable as vaccines become more likely.
3) Our economists have recently made upward revisions to their economic forecasts and it is likely that analysts’ expectations will follow.
4) Our Bear Market Indicator (which was at very elevated levels in 2019) is pointing to relatively low risks of a bear market despite very high valuations.
5) Policy support remains very supportive for risk assets. There is both a central bank ‘put’ – a belief that central banks will be there to provide as much liquidity as is required – and a fiscal ‘put’ as governments have scaled up their willingness to support growth.
6) The Equity Risk Premium has room to fall.
7) The resumption of zero nominal interest rate policy in the recent past, together with the extended forward guidance, has created an environment of greater negative real interest rates. This should be highly supportive to risk assets in an economic recovery.
8) Equities offer a reasonable hedge to higher inflation expectations.
9) Equities look cheap relative to corporate debt, particularly for strong balance sheet companies (60% of US companies and 80% of European companies have dividend yields above the average corporate bond yield).
10) The digital revolution continues to gather pace. We think this transformation of the economy and stock markets has further to go. These companies could continue to drive valuations and returns in this bull market.
One thing that is very important for investors to remember is that a massive part of the upside in the markets, especially the Nasdaq, is a result of huge runs by mega-cap technology stocks.
However, with the tailwind of continued government stimulus, hopes for a COVID-19 vaccine, a continued renewal in the economy (which was booming prior to the pandemic) and continuation of low interest rates, a renewal of the bull run off the March lows is indeed possible, albeit perhaps after a 5% to 10% pullback.
It’s also important to point out that almost 70% of all stocks have gone up less than the S&P 500 index. An astonishing half of all stocks in the United States are either flat or down in the past three months. If you extend that out over the past year, you once again have the S&P 500 beat 70% of all stocks, but this time, 58% of all stocks are either flat or down.
What this means, and we saw this in the huge selling late last week of both Tesla Inc. (NASDAQ: TSLA) and Apple Inc. (NASDAQ: AAPL), is that while some of the technology giants are very crowded trades, and they may be poised for some intense profit-taking, especially as 2020 starts to wind down, a ton of stocks are offering investors very reasonable entry points.
Lastly, there is a distinct possibility for rotation to value from growth and to cyclicals from consumer discretionary, as well as other market readjustments that could help the bull market on its upward trend. It makes sense though to be very careful here short term, raise some cash, take some profit from winners and see if we don’t get a typical September and end-of-the-quarter pullback—one that we may already be in.
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