The world’s major stock markets have been in a secular bear market since the year 2000. However, unprecedented stimulus efforts by the world’s central banks is likely bringing the 13 year bear market to an end, and it now looks safe to reenter the market and be long stocks.
The case for being long stocks
The world’s major stock markets, such as the S&P 500, Dow 30, and the FTSE 100, have been in a long down-trend, known as a secular bear market since the year 2000. During the past 13 years volumes declined as investors pulled money out of stocks and went into bonds. As a result stocks have been range bound, moving up and down in cyclical bull and bear phases, but failing to make new highs.
Now however, thanks to unprecedented monetary stimulus from central banks around the world, the secular bull market looks to be coming to an end.
Since the financial crisis hit, and in their attempts to avoid a deflationary depression, the four largest central banks (the Fed, the ECB, the BoJ and the BoE), have printed $9 trillion. In the last twelve months alone, governments around the world have enacted 335 policy stimulus measures that are designed to, bailout banks, devalue currencies, boost spending, end deflation, and generally appease voters.
It is true that heavily indebted western consumers are deleveraging, however governments are releveraging and ramping up spending in order to fill the void. In doing so they have created a tidal wave of liquidity and pushed it into the global financial system, and although this money is doing little to help the real economy, it is finding its way into the financial markets, in particular stocks and bonds.
Since the early 2009 lows, the S&P 500, Dow 30, and the FTSE 100 have risen 122%, 110% and 78% respectively – as they climb the proverbial “wall of worry”.
A 15 year chart of the S&P 500 (blue), Dow 30 (purple), FTSE 100 (green) & the Dow transports (orange) (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
It’s all in the price
Interestingly it is predominantly technical analysts, rather than those that study market fundamentals, who are bullish on stocks. The reason it that technical analysts (known as technicians), believe that everything effecting a company or market is reflected in its price, and therefore that is what they study. And as several respected technicians are pointing out, we have many different markets breaking out to new all-time highs. These include the S&P 400 mid-cap, the Russell 2000 and the Dow Transportation Average, and as Carl Swenlin noted recently, some of the equal weighted indexes such as the Guggenheim S&P 500 Equal Weight ETF, are also at all-time highs.
One technician who is bullish on the market is Dave Nicoski, Director of Research at Vermilion Technical Research. In a recent interview Mr Nicoski said that he believes, “that from a technical perspective” the market is “structurally much more sound than most people give it credit for”.
Two of the things that Mr Nicoski sees as important when assessing the market, are sector rotation and leadership, and right now investors are gravitating to the financials and healthcare which were previously somewhat unloved. As money has moved into these sectors it has improved the breath of the market, something which is also bullish.
Many technicians also follow Dow Theory which, broadly speaking, states that a rise in the Dow industrial stocks must be confirmed by a rise in the Dow transportation stocks. The theory being that if goods are being produced, they must also be shipped.
During much of 2012 the Dow Jones Transportation Index did not confirm the new highs made in the Dow industrials. In recent weeks however, the Dow transports have risen rapidly breakout out to new all-time highs, and Mr Nicoski believes that this has confirmed the move in the Dow industrials.
To confirm his bullish outlook Mr Nicoski is looking for a breakdown in the US dollar, a continued rally in stocks, particularly those in the financial and energy sectors, and a breakout in gold.
Another respected technician who believes that stocks are heading higher is Craig Johnson, Senior Technical Research Analyst at Piper Jaffray. The market is making higher highs and higher lows and it continues to overcome worry after worry, and Mr Johnson sees confidence in the current uptrend building. Craig stated recently that the S&P 500 is likely to reach 1,700 this year – perhaps as early as late summer, a 14.5% rise from its current level – though he also sees a retest of the 1,550 level as likely once the new high is made.
One important catalyst for higher prices is likely to be the flow of money out of bonds and other fixed income investments, into stocks. This is likely to provide sufficient momentum to finally drive the large-cap indexes through their 2000 and 2007 highs.
The bottom line
In the years ahead the economies of the west will continue to face the headwinds of private sector deleveraging, negative demographics, rising taxes and lower real disposable incomes. Therefore the days of 3 or 4% economic growth are long gone and won’t be coming back until after the economic reset has happened.
In the mean time however, governments are desperately trying to maintain the status quo with massive injections of freshly printed money, and this new money is flowing into the markets and bidding up the value of stocks. As a result we are now moving into a “risk on” environment in which stocks look set to end their secular bull market and continue their liquidity-fuelled rise.