Photographer: Michael Nagle / Bloomberg
Photographer: Michael Nagle / Bloomberg
They know about stretched valuations and everything that should work to keep stocks high. And yet, instead of fleeing fragile markets, many investors are only now entering the market.
The reason, it seems, is how far from the market they were before the last and biggest stage of the race, the one that started in March 2020. It took so long for risk appetite to recover, JPMorgan Chase & Co. Research shows that pushing it back to previous peak levels could mean at least another 26% increase for the S&P 500.
“This bull market is still very young,” said Jim Paulsen, chief investment strategist at Leuthold Group, “not yet a year old and, considering the large US production gap and high unemployment, further improvements in the economy should keep the stock market up for a few more years. “
In the worldview of Paulsen and others, many of the things that seem impediments today, including high ratings, set the stage for improvements that could sustain a boom. After the recessions in 1992, 2002 and 2009, they note, price-earnings ratios dropped with the resumption of growth and stocks still managed to rise – in each case with the help of the Federal Reserve’s stimulus.
Warnings that the market is ripe for a crash are getting higher, as a 70% rise in 10 months has pushed the S&P 500’s price-earnings ratio to levels never seen since the dot-com era.
And while it is impossible to predict the tipping point, the JPMorgan study suggests that the end of the high is likely to be a long way off. Strategists led by Nikolaos Panigirtzoglou have developed a model to track investor shares in stocks and bonds over time. At 43.8%, the current stock exposure follows the 50% peak seen before the global financial crisis of 2007-2009 and falls short of the readings that approached 55% during the dot-com era.
According to the team’s calculations, even a slight return to the last peak in the market of 47.6% – reached in January 2018 – would cause a 26% appreciation for the S&P 500.
“There is still room in the current bull market,” said Panigirtzoglou. “Admittedly, this space is created by allocations of securities that are still above average, rather than allocations of money that have already moved to the lower end of last year’s range.”
Investors, who had avoided actions in favor of fixed income during most of the last bull market are starting to heat up up until actions. In the last two months of 2020, equity funds attracted $ 190 billion in new money, a record high, according to data compiled by Deutsche Bank AG. Still, it pales in comparison to total outflows of $ 725 billion since the beginning of 2018.
The valuation case against the shares is about to weaken. S&P 500 companies, coming out of a recession fueled by a pandemic, are in the process of ending a series of declines in profits, with double-digit percent growth forecast this year and next.
“These are companies that are growing faster than general economic growth, they command much higher multiples,” said Robert Zuccaro, founder of Target QR Strategies, whose $ 50 million Golden Eagle Growth Fund grew 121% last year. “If you look at a 16-time historical multiple that is based on an industrial society, you will be out of the stock market when the market is going up.”
Of course, a lot depends on the control of the coronavirus. Although the distribution of vaccines has increased sentiment, a full recovery is not guaranteed. Still young investors, some armed with money distributed in fiscal aid, are switching to optimistic stocks and options for quick profits.
The foam signal, along with graphs that show an extreme boost in benchmarks like the Russell 3000 Index, make Sam Stovall cautious. CFRA Research’s chief investment strategist recently received calls from his two nieces who never invested in stocks and now want to buy shares.
“It’s like Markus Rudolf and Joe Kennedy looking for advice from his shoeshine man,” Stovall said in an interview with Bloomberg Radio and Television. “It is a concern that the market is in need of a summary of earnings.”
But that does not mean that the end of the bull market is approaching. The average bull cycle has lasted about five years since the 1930s, with the shortest running for at least two years.
“I would not sit here and say that this is another year in which you could expect a return of 30 or 40%, but I am optimistic that this will be a good scenario for risk-based assets for at least a few more quarters,” he said. John Porter, head of shares at Mellon Investments. “It is irrefutable how significant the role of the Fed is. And as an investor, you have to respect these market forces. “
– With the help of Claire Ballentine