There’s little doubt that we are in both a short and long-term bull market. The only question investors must answer is how long the gains will continue.
Bull market grinds higher
In the short term, the rise since the April low has been remarkable. In the high teens in terms of percentage growth here in the UK and Europe. Well into the 20s in the US and China. While Japan is leading the pack with a 35% gain since the spring. Over one year, all the main markets are between 10 and 20% higher while China has notched up a 30% gain. Since the market low in October 2022, the US has risen by more than 80%, closely followed by Japan and Europe. The FTSE 100 is around 40% up and China 20% better. Last week saw the US market move sideways at close to its all-time high. Here, the FTSE 100 hit a new record at around 9,300.
Stand back and look at the longer-term picture and it is equally encouraging. Shares have been rising since the financial crisis – a 16-year bull market and counting. In the case of the US, which has led the pack, notably in the last 10 years, the S&P 500 recently registered a 10-fold gain since its March 2009 low point.
How long this goes on will depend, as ever, largely on earnings and valuation and the extent to which investors buy into the latest AI growth narrative. The first of these two continues to look positive despite the well-understood headwind of tariffs. Third quarter earnings season kicks off in just a few weeks and the current forecast of 7% year on year growth in profits looks cautious. It is usually upgraded as earnings emerge, so another quarter of double-digit growth looks likely.
How much investors should pay for those earnings is the second key part of the price equation. The most widely-watched measure – the price-to-earnings ratio – is looking stretched in the US at around 25 times earnings but not yet at the near 30 level it reached at the height of the dot.com boom 25 years ago. When measured against sales, however, prices look to be at a high for at least the last 30 years, having outpaced the level reached as we emerged from Covid four years ago.
The rest of the world looks less stretched, with non-US shares trading on about 16.5 times expected earnings despite the recent strength of global indices in what has become very much a global bull market. Having lagged the US for a decade, there is still potential for the rest of the world to play catch up.
So, depending on your temperament, it is possible to make a case for the bull market continuing or for it to hit the buffers some time soon. The reality is that no-one knows and history suggests that going with the flow is usually the best policy, especially when, as now, there is a strong growth story underpinning the rally. The trend, as they say, is the investor’s friend.
The market hits a new all-time high roughly a third of the time, so just because shares hit a new record level is not, by itself, a reason to worry. Key to continuing positive sentiment will be whether investors remain optimistic about the productivity potential of the AI revolution or start to worry that the massive amounts of investment in AI infrastructure may be wasted. The jury remains out on who will be the biggest beneficiaries and when the gains will come.
One reason to expect markets to continue to rise is that policy remains supportive. That’s true of both fiscal policy, where governments are showing no obvious desire to cut spending – the reverse actually. It’s true too of monetary policy, especially in the US where the pressure to keep rates lower remains.
This over-easy monetary policy against a background of high government debts and deficits is known as financial repression or fiscal dominance. For the foreseeable future, it looks like the template for investment markets and typically such an environment has favoured shares and gold over bonds because it tends to be inflationary.
Gold hits another new high
Certainly, the strength of stock markets is being matched by similar strength in the gold price, which last week hit new highs above $3,800 an ounce. Gold has now more than doubled in three years, as investors seek out a safe haven in the face of persistent inflationary pressures and a weak dollar. Gold’s junior partner in the precious metals space – silver – is also riding high, priced at its highest for nearly 15 years. Silver has more industrial uses than gold so is not such a pure safe haven play but it benefits from many of the same drivers as the yellow metal.
China picks up the leadership baton
One market that has caught investors’ attention in recent months has been China. Long out of favour, due to a persistent property slump and slow emergence from Covid in terms of consumer confidence, the Shanghai, Shenzhen and Hong Kong markets are firmly back in favour today.
There seems to have been a real shift in momentum in China, although question marks remain about how firm the foundations really are. The rally in shares feels quite liquidity driven and less about fundamentals, because consumers remain cautious and the property market is stabilising at best and not really recovering.
But things are definitely getting less worse, valuations remain cheap relative to developed markets, and inflows from domestic investors have turned decisively positive. That’s due in large part to the fact that with capital controls in place, local investors have only limited choices about where to park their high levels of savings.
Cash is unappealing in a low interest rate environment, property is no longer attractive and gold has already enjoyed a strong run. Boosted by better levels of interconnectivity between the mainland and Hong Kong markets, investors are starting to gravitate to the stock market again.
By Tom Stevenson, Investment Director, Fidelity International
