Is the End of the Secular Equity Bull Market in Sight? – Strategic Series # 4

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Published on 27 June 2014

Room for Further Market Appreciation… but Growing Vulnerability


In Strategic Series #2 (Oct 2013 – OPPORTUNITY FOR A MELT-UP), we argued a [20% to 30%] melt-up scenario could be on its way based on multiple expansion and earnings growth
7 months later, we are halfway from the lower bound

1. Since Oct-2013 S&P 500 rallied c.a. +10% (+12% Total Return)
PE expansion has accounted for most of the performance (+8% vs. +2% Earnings Growth).

2. Valuation is starting to look demanding :

12m trailing PE (17.8x) stands at 14% premium to historical average (since 1945)

Adjusted for cycle (CAPE), Valuation is closed to a one sigma event i.e. 39% premium to historical average (since 1945)

3. Duration of the Cyclical Bull Markets (CBM) looks extreme: history now shows only 3 CBMs with longer duration

Marchés Haussiers CycliquesBanque Pâris Bertrand Sturdza SA

Is the End of the Secular Equity Bull Market in Sight? Room for the final leg-up?

1. In most cases, long CBMs end in recession / inverted rate curve

Current Business Cycle looks long: 60 months vs. Historical Average of 58 (source=NBER, since 1945, 11 cycles excluding current cycle).

However, we have not fully recovered from the 2007 Business Peak

Bond Yield Curve steepness is at extreme levels

2. Economic Fundamentals seems to give some comfort over the short-term

Leadings Indicators suggest a pick-up in US economy after a false alert following the extreme winter

The remaining slack in the economy is consistent with a long lasting non-inflationary recovery

3. Micro Fundamentals have yet to improve for the Market to reach new highs (i.e. Earnings Growth)

4. Complacent Investors combined with Stretched Valuation add vulnerability to the market
What Catalyst for a Cyclical Bear Market (-20% Correction)?

A monetary policy mistake leading to a radical change in rates market expectations