Why this bull run isn’t over

Wednesday, 19 June 2019
Adelaide, Australia
By Bernd Struben

US and European stocks were on a tear overnight.

Cheered on by dovish comments from European Central Bank chief Mario Draghi and positive noises from Trump on a potential China trade deal, every major index closed well into the black.

France’s CAC 40 led the pack. It closed the day up 2.20%. That puts its one year return at 2.21%. I’ll let you do the maths on the one year return before yesterday’s gains.

For the 2019 calendar year, however, the CAC 40 has performed a lot better. It’s up 17.9% since 2 January.

That’s true for most global markets, which fell hard in the latter months of 2018 before central banks — led by the US Fed — rode to the rescue with the promise of ever more cheap money.

This includes the ASX.

Despite the heavy sell-off from October to December last year, on a one year basis the ASX 200 is the best performer among the world’s major indices. It’s up 8.80% over 12 months.

As you can see in the year-to-date price chart below, we largely have 2019 to thank for that.



chart image
Source: Google Finance
Click to enlarge

At time of writing the ASX 200 is up 19.5% since 2 January.

Unless there’s an unexpected sell-off in the final hour, the ASX should close at a level not seen for more than 12 years.

Though that’s still 3.2% below its all-time record.

Spare a thought for the investor who went all in on Aussie stocks on 1 November 2007. That’s when the index reached its highwater mark at just over 6,850 points.

FOMO (fear of missing out) must have been running at peak levels. Perhaps that’s what finally roused our imaginary investor out of their defensive cash, bond and precious metals portfolio to finally take a punt on stocks.

I was working in The Hague at the time. But I imagine they were heady days for Aussie investors.

After all, on 31 May 2006, the ASX 200 stood at 5,001 points. According to my trusty Casio calculator, that’s a gain of 37.0% in the 16 months to 1 November 2007.

Of course, you know what happened next.

By 6 March 2009 the ASX 200 had plunged to a low of 3,145 points. Down 54% from its peak.

I take you on this rollercoaster ride up and down memory lane for a reason. And that’s because analysts are coming out of the woodwork wondering if we’re set to repeat that epic crash.

In other words, will the ASX set a new record this year only to plummet to a level it will take another 12 years to recover from?

The short answer, in my opinion, is no. At least not for a number of years yet.

We’ll get back to that, right after a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 353.01  points, or 1.35%.

The S&P 500 closed up 28.08 points, or 0.97%.

In Europe the Euro Stoxx 50 index finished up 69.68 points, or 2.06%. Meanwhile, the FTSE 100 gained 1.17%, and Germany’s DAX closed up 245.93 points, or 2.03%.

In Asian markets Japan’s Nikkei 225 is up 366.81 points, or 1.75%. China’s CSI 300 is up 2.01%.

In Australia, the S&P/ASX 200 is up 69.80 points, or 1.06%.

On the commodities markets, West Texas Intermediate crude oil is US$54.33 per barrel. Brent crude is US$62.48 per barrel.

Turning to gold, the yellow metal is trading for US$1,345.46 (AU$1,955.89) per troy ounce. Silver is US$15.00 (AU$21.81) per troy ounce.

One bitcoin is worth US$9,113.00.

The Aussie dollar is worth 68.79 US cents.

Records are meant to be broken

Stock market valuations are running high enough to signal a pending correction…if not a full blown crash. And the world’s leading nations are saddled with record levels of debt. Governments, businesses and citizens alike.

So why don’t I think we’re staring a major crash in the face yet?

Because no government wants their nation’s economy or stock market to crumble on their watch. And, mounting debts aside, global governments have a lot of fuel left in their bail-out tanks.

There’s not all too much room left to lower interest rates. Though rates in Europe, North America, Australia, Japan and China are all more likely to go down than up this year. It’s this expectation that’s helped fuel the latest run higher.

And there is plenty of firepower left in the realm of quantitative easing. That’s where central banks snap up government bonds to pump billions of dollars into the system. Rumour has it the Reserve Bank of Australia may try its hand at QE as soon as this year.

Carpe diem. Someone else can pay that bill later.

Look, it won’t end well. But today’s concerted efforts by the world’s central banks to keep markets afloat is unprecedented. Backed by government stimulus measures, I agree with Cycles, Trends & Forecasts editor Phil Anderson on this one.

The next 12 months may well see a market correction and overall slowdown in growth. But the real crash is likely still years away.

In the meantime, sitting on the sidelines could see you miss out on years of stimulus fuelled gains. Fundamentals be darned!

Narrowing our vision to the shorter term, the US Federal Reserve meets later today, overnight Australia time. The Fed’s not expected to cut rates this time around. An expectation that’s already priced into the markets. So long as Fed chairman Jerome Powell doesn’t hint at any tightening, investors should be pleased enough.

And with Trump already looking to axe Powell for not lopping 1% or more off the US cash rate, the odds of the Fed chair sounding any hawkish notes are long indeed.

Speaking of Trump…there are more reasons to be optimistic about stocks in the shorter term.

From Bloomberg:

President Donald Trump said Tuesday that he had a “very good” phone conversation with Chinese counterpart Xi Jinping. The two leaders will hold an “extended meeting” at the G-20 summit on June 28-29 in Osaka and “our respective teams will begin talks prior to our meeting,” Trump said on Twitter. The U.S. president had repeatedly threatened more tariffs if Xi spurned the opportunity to talk.

“The meeting might very well go well,” Trump told reporters as he departed the White House to officially launch his re-election campaign in Orlando. China wants to make a deal, he added. “That is working out pretty much as I anticipated,” he said.

The mainstream media loves to pan Trump. But the reality they can’t admit is that Trump is a wily negotiator…not a buffoon.

With his re-election campaign now officially underway, Trump is going to want to put an end to the trade ructions sooner than later. He won’t accept any old deal. But he’ll certainly compromise.

And as the 2020 presidential election race kicks off in earnest, he’ll take full credit for ‘levelling the playing field’. Not to mention for sending US markets to new record highs.

Despite his potential lifetime position as supreme leader, Xi will be feeling even more pressure to strike a mutually acceptable deal.

International companies are already beginning to relocate outside of China to avoid punishing US tariffs. If Trump doesn’t get a deal he can sell to US voters back home, he’ll almost surely ratchet up those tariffs further. That will prove a massive drag to China’s growth plans over time.

Xi is either going to have to bend with the wind in the coming months…or snap in the storm in the next few years.

I believe he’ll bend.

Not that a final deal will be signed in Japan on 29 June, mind you. But both leaders will likely emerge announcing significant progress. Further tariffs will be delayed.

And stocks will rally.

Cheers,
Bernd