The peak is in sight, but we are not at the peak. That’s one interpretation of where we are in this historic bull market in US equities.
If we are late in the cycle, what then should we be doing with our money?
They don’t ring a bell at the top or the bottom, but we’re getting close
March 6, 2009 – that is a day I remember well. It was my mother’s birthday. But that happens every year; 2009 I remember specifically.
It was the day, after all the turmoil of the global financial crisis, that the S&P 500 made its low. 666 was the number – 666 on 06/03/09. There’s a nice symmetry to that number. I actually wrote an article two days before saying buy the S&P. I promise you I did!
We didn’t know it was the low at the time, nor that the date would have significance. There isn’t, unfortunately, some butler who comes out and sounds a gong to let you know that the market is at a major turning point. Turning points pass quietly and only make a noise when looked at through the rearview mirror. I just happen to remember the date because of the article.
What began was one of the greatest bull markets in all history. It’s a bull market that is still going on now, over eight years later. It’s a bull market that has practically destroyed value investing, stock picking, hedge funds – any kind of edge or expertise. All that’s been required are tracker funds. Be long the index. That’s all you’ve needed to do.
As I write, the S&P 500 stands at 2,477. It is up over 250%. It has almost quadrupled. If my maths sound off there, it’s because a double is only a 100% gain, a triple 200% and so on (2,664 would be a quadruple – or 300%). The bull market has gone on, by my calculations, for 101 months.
That doesn’t actually make it the longest American bull market in history. The longest lasted 113 months, between October 1990 and March 2000. That saw gains of over 400%. It ended with the epic blow-off top that was the dotcom bubble.
Today I’d suggest that we are not yet at the top. The trend is still strong and trends persist. Believers are many. Valuations may be high, but they are not “year 2000” high. There may be signs of deterioration, if you look hard enough. Some sectors have rolled over, but leadership has moved to other areas of the market and the index grinds upwards.
American belief in the immunity of their stockmarket is as embedded as British belief in the housing market. It will take quite something to change that.
But given the length of this bull market, it’s not unreasonable, I don’t think, to describe where we are as “late in the cycle”. And so, perhaps, we should be looking at late-cycle assets.
One manifestation of this is the outperformance by emerging markets of developed world markets.
These assets look very cheap versus the S&P 500
This chart shows the S&P against EEM, which is the US-listed exchange-traded fund (ETF) which tracks emerging markets. When the line is rising, emerging markets are outperforming; when it is falling, the S&P is winning.
If you look at the period from 2009 to 2011, you can see how much better than the S&P emerging markets did. This coincided with an incredible boom in commodities – especially gold and silver – but base metals, soft commodities, grains and energy as well. This boom ended in autumn 2011, at the same time as one of many Greek crises.
Since 2011, the S&P has outperformed relentlessly. However, in early 2016 something changed. There was a reversal, one that again coincided with a strong rally in commodities, and emerging markets outperformed.
But it didn’t last. All the gains from the first half or three quarters of the year were given back by the end. It looked like yet another bear market rally. Nothing more.
But, actually, no. The ratio re-tested those old lows and then reversed. It looks like a classic double bottom to me. And all through 2017 emerging markets have been outperforming the developed world.
Now the action looks like this. This is the same chart – just of the last 12 months. Emerging markets are outperforming.
There all sorts of emerging market ETFs to choose from in the UK, if this trade interests you. Vanguard’s is listed under the ticker VFEM. The dollar denominated iShares option trades under the ticker IEEM.
If you want to get really cute and play the ratio, the trade is to be long emerging markets and short the S&P.
Another late-cycle asset, which tends to do very well in an inflationary, stock-market-blow-off top scenario – should one be on its way – is commodities, especially base metals and energy. Gold and silver also tend to do well. (I wrote about gold and silver a couple of weeks ago – while I see a summer rally, I’m less convinced about a multi-year bull market being on the cards.)
Copper and zinc, for example, are both showing signs of real strength. Oil too, even with yesterday’s sell off.
Below are base metal mining stocks (based on the US-listed exchange-traded fund XME) versus the S&P over the last ten years.
Again we see the multi-year declines, but over the last 12 -18 months signs of a change in trend.
And here is gold versus the S&P over the same period – I have to say this chart made me want to eat my words of a fortnight ago.
An ounce of gold was worth 1.7 times the S&P in 2011. Now it is worth just over half the S&P. The S&P has outperformed by some magnitude.
Unlike emerging markets and base metal miners, gold has not rallied against the S&P at all in 2017. But my goodness me those declines look like they have run out of steam. A low was made in 2016. It has been re-tested several times in 2017 – four by reckoning – and doesn’t appear to want to go any lower.
There are two ways of interpreting that action. One is that all the re-tests mean the low is in place. The other is that eventually it will give. I must say I’m inclined to go with the former, especially if the S&P is headed into final blow-off top mode.
But what a symmetrical place for a multi-year low: gold at half the S&P!
But the main takeaway from today’s missive is to be looking at and be long late cycle assets: emerging markets and base metals, especially.