Bull markets come in all shapes and sizes.
The hysterical madness of cryptocurrencies. The relentless, central bank-driven rise of the S&P 500. The long decline of interest rates.
But there’s one sort of bull market I like better than most. The quiet ones. The ones you only see when a previously-despised asset starts to turn a corner.
There’s one such sector that has been doing extremely well in recent months, even at a time when everyone is starting to fret about the sustainability of the wider market rally.
The mining sector…
Investors aren’t rational – thank the Lord
In early 2016, metals prices started to recover along with mining stocks. They had a cracking year, all told. And little wonder – they were coming out of a brutal five-year bear market that had starved supply as companies were forced to become lean and mean again.
From an investment point of view, the most interesting thing about long bear markets is that they don’t just starve supply, they also choke off investors’ supply of goodwill. And this is what really creates the opportunities in markets.
If markets were purely rational, and all investing was “reality based” (for want of a better phrase), then you wouldn’t get these extremes of under- and over-valuation. People would be able to look at a company and its share price dispassionately, and decide whether the outlook today justified higher or lower prices. As a result, markets would be a lot more efficient than they are and it’d be hard to make any money.
Thankfully, that’s not what they’re like. You need only look at what’s going on in cryptocurrencies right now to realise that. It’s the ultimate in hope-based investing. “I’ve no idea what they do, but the price is going up and as long as I can sell my magic beans to some other mug before it collapses, I’ll be fine.”
Markets have memories, and emotional cycles. Greed, hope, fear, shame – they all play a role in shaping investors’ attitudes and actions, one that’s at least as important as the hard numbers. And it’s this wonderful emotional overlay that creates the best opportunities.
At the bottom of a bear market, investors aren’t just sceptical about future prospects; they feel positively betrayed. They invested in the hope of making big gains – that hope lead them not only up the garden path, but then all the way up a certain creek without a paddle.
By the time the long, painful process of the bear market is done, their hopes have been crushed and the sector in question is associated only with pain. The disappointment has hardened to disdain. The walking wounded have moved on to other, better investments – ones that will treat them right.
Even if their former flame appears to recover, they ignore it. It’s disappointed them before; it’ll do it again. Besides, it’ll never regain the heights of the previous bull market. So why bother?
It’s this sort of emotional scar tissue that enables a sector to more than double in a year without really drawing much attention or enthusiasm at all. Which is roughly what happened to the mining sector (as measured by the biggest stocks in the sector) in 2016.
Then, in late January and early February this year, progress stalled. The major mining stocks lost about 20% of their value over the next three months. But in May, the correction bottomed out, and over the last six weeks or so, mining stocks have rallied strongly to recover their February highs.
The question now is: can this stealth bull market continue?
Can the mining bull market last?
The mining recovery is no longer happening as quietly as it was. Suddenly, for example, everyone has noticed that copper has had a stellar few months.
The price of “Dr Copper” (the nickname stems from the old joke that copper has a PhD in economics – it is widely seen as a good leading indicator of economic growth) has soared by around 20% since the end of May and is now sitting near a three-year high.
There are lots of arguments as to why this is. One is that Chinese economic data has been decent recently. China also plans to crack down on scrap metal imports as an environmental measure, which would mean more demand for most metals, including copper.
Another is that the US dollar has been weakening (although that started quite a while before the rally in copper did).
Yet another is that some of the electric car mania in the lithium sector has rubbed off on the metal – all those plugs need wiring with something, after all. In fact, notes the Financial Times, UBS reckons that battery-powered vehicles will account for 5% of copper demand by 2025.
The power of story
The thing is though, these are all vague views. The truth is, when you read around, no one is entirely sure what’s driving this market higher. That’s interesting in itself.
You see, one thing you realise after a long while in this business, is that stories follow prices, at least as much as the other way around. This is most obvious in the miracle of fiction that is the regular market report that most financial news outlets emit a few times a day.
The oil price moves a couple of dollars either way because of “tension in the Middle East”. The FTSE 100 edges higher or lower because of “fears about Brexit uncertainty”. None of this has much basis in reality, it just fills in a few words.
So the lack of apparent justification for a rising copper price doesn’t tell me that the copper price is heading for a collapse. It tells me that there’s still an awful lot of scepticism around. It tells me that no one expected this to happen, so they still haven’t come up with the stories to explain why it’s happened.
As the great Sir John Templeton put it: “bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria”. We’re clearly still in the scepticism phase for mining and commodities right now.
Sure, copper certainly might be overbought just now on a technical basis or whatever, but unless you’re a trader that doesn’t matter. If, on the other hand, you’ve bought and held some mining stocks, you should feel comfortable continuing to hold on.
And if you’re not already in, I’d imagine there’s far enough to go that it’d still be worth buying in now (although maybe put your money in gradually – that way you’ll catch any pullbacks that arise).