Opportunity for a melt-up – Strategic Series # 2

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Published on 11 November 2013

 

Key Messages: a range from +18% to +28% for US Equities

 

1.Performance & Duration: Current Cyclical Bull Market duration of 55 months is in line with the historical average of 60 months & median of 57 months since 1949

5 observations (out of 10 CBMs since 1949, 17 since 1927) of longer Cyclical Bull Markets including the 1st after WWII CBM, the euphoric CBMs of 1980’s 1990’s and the 2002-2007 CBM

The median end level of a Cyclical Bull Markets stands at 23% above previous Peak. Current level stands at +12% above 2007 peak and indicates there could still be room for further appreciation

 

2.Valuation: The median PE at peak relative to Long Term Average (~ 16x) stands at @ 10% premium

Current valuation in line with LT Average suggests more comfort over the mid-term in comparison with previous peaks.

 

3.Economic Cycle: Current economic environment differs significantly from previous long lasting Cyclical Bull Markets peaks. In Most cases, long lasting Bull Markets end with recession

 

4. Opportunity for melt-up scenarios: Equity market indicators (Liquidity, Zero Interest Rates Policy, Valuation, Sentiment, Eco / Business Activity, Earnings recovery) are relatively well oriented and suggest melt-up scenarios are possible

Scenario 1) Partial Melt up PE Expansion of 1.3 pts (from 16.7x to 18x [LT Average+10%], i.e. +8% change) Earning growth of ~10% (vs. 7% LT Average) Market Performance of ~18%

Scenario 2) Melt up PE Expansion of 3.0 pts (from 16.7 to 19.7 [LT Average +20%], i.e. +18% change ) Earning growth of ~10% Market Performance of ~28%