Saturday, August 25, 2018

What 11-year Bull Market?

It seems a sign of the times that we keep on talking about an 11-year bull market in stocks while we should say an 11-year long bull market in U.S. stocks. And even then, they experienced on two occasions a 20% decline which should have been called shallow bear markets instead of corrections.

We wonder why we don’t have the 300% gains in our portfolios as reported for this ‘bull market’. Are we such poor investors that many make not much money in an environment that lifts all ships with the rising tide?  I found the graph below in the Wall Street Journal and it explains a lot.

Many parts of the world did experience much more tepid markets. Europe over those eleven years did barely double and peaked just above 100% not only in 2017 but also in 20014 and even in 2011.  That is not a rising bull market but instead it is a ‘trading range’. Yes, emerging markets were more volatile, but they also had a peak in 2011 and then again in 2017. 

To call THAT an eleven-year bull market is a serious exaggeration. Most of the U.S. bull market is not based on a broad advance of many individual companies – it is much narrower and restricted to mostly FAANG and its accomplices. No wonder it is so difficult to make a buck in those markets except in the High-Tech world.  In China we also saw great growth in stocks like Tencent and Alibaba. But it was more muted than in the U.S. Especially since many emerging markets including Asia are having dirt cheap valuations compared to U.S. based public companies.
Look no further than Canada with its depressed resource industries.  Was it not for red hot real estate pumped with extremely low interest rates and overseas investors needing a ‘safe-haven’ to store their wealth away, our Canadian economy might have resembled Europe’s. Our banks, already escaping the damage as experienced by U.S. banks in 2008, have done extremely well with consumer credit and mortgages until now.  If the commodity boom finally arrives our banks may flourish even more.  
Yes, in Canada if you stuck to the banks you’d done great. Insurance was a lot tougher because they couldn’t park their float (premiums) in profitable and safe bonds.  But the age of extreme low interest seems to be over, especially in the U.S.  The U.S. is farthest ahead with raising interest and their economy does not only experience more growth due to low commodity prices, but the advance of the energy revolution also provided ample locally sourced hydrocarbons making them less dependant on OPEC with numerous consequences.  For one, less defense spending. The U.S. has best recovered from the financial crisis and with its relatively young demographics it avoided the stagnation and debt crises experienced in Europe.  That the U.S. is weakened by Europe’s and Canada’s unfair trading practices, as claimed by Trump is laughable. The differences with China are another story though.
As soon as Europe thinks it can start raising interest rates as well, then the current trend of a strong U.S. dollar is likely to break. It may also reduce the pressure on many emerging market economies. So that is why it was so difficult for many investors to make money away from the U.S. markets and it became nearly a self-fulfilling prophesy. 
The coming commodity boom may help economies such as Australia and Canada. It may still be a drag on Europe. The U.S. with its oil-shale basins will likely continue to do well. But a booming North America may be clamoring for cheap or affordable imports from China, India and other emerging economies. This may strengthen the already fast-growing economies in China and possibly even more so India. The latter is undergoing significant and beneficial economic reforms. Combined with their growing middle classes this may be the short-term source of demand for more resources and rising commodity prices.  The next five years may be good for Canada’s stock markets and your portfolio performance. U.S. earnings may have peaked but don’t write that market off. 
Looking back, I think my portfolio performance would have been better had I invested more in the U.S. and less in Canada’s resource economy. Well, good old Justin and his green-pawed friends already motivated me to do so. Over the coming years, especially if we get a more conservative government, Canada is likely to do better, but it will probably still have trouble keeping up with the U.S. With the on-set of inflation, I think that stock market returns of 9 to 12% will become realistic again – but first we may experience a market crash led by FAANG.
As allways, we cannot time the stock market and its downturns.  We can only build cash if prices rise and risk increases.  I guess that game is likely to continue.

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