6 Reasons to Stay Bullish

It’s March and the year already feels like it’s been a long one…

So the question I am going to attempt to address here is… What are you meant to do with stocks here? There are increasing questions about whether we are at the end of the 12 year bull market? Or is this just a bump in the road as the asset class continues its march higher?

The Perma-bull view involves agreeing that many equity valuations are unsustainably high, and that the level of NASDAQ speculation is very reminiscent of what others saw in the 1998-2000 ‘dot com’ bubble. And in a similar way many expect this bubble to burst causing pain for the tech investors but when? 

However, one key difference will be when this bubble burst there will be no contamination to the broader stock market and therefore I believe it is still good to remain invested in global equities and these are my 6 reasons as why even thought expecting dot-com bubble part 2:

1. Lessons from dot-com bubble: Assuming that nasdaq speculation today is roughly comparable to what it was during the 1998-2000 bubble – that expectation suggests that the current bubble could have another 6 months to go and that the px of bubble assets could rise by another 50% or more before the inevitable crash happens! OR maybe things could get even wilder! Cyclically adjusted px to earnings ratio / CAPE for NASDAQ 100 today stands at a dizzy 57. This was similar to the level in ’98 at which point the bubble continued to expand by ANOTHER 140% over the following 15 months! Imagine Tesla’s stock price then!
2. MACROECONOMIC. CONDITIONS: Much more likely to make unprecedented valuations sustainable than in the 2000 dot-com bubble, or in the 1998 Japan bubble or credit bubble of 2005-08. Interest rates are very near 0% and are expected to stay there for at least 2yrs, whereas in previous bubbles MPC was being tightened. Also importantly global economy is only just emerging from a very deep recession and is therefore in the very early stages of a cyclical upswing. When the ’00 bubble burst by contrast the world eco had just experienced its longest expansion in history and a recession was arguably overdue. Similarly the eco cycle was long in the tooth when Japan’s bubble burst in ’90 and to a lesser extent in the US in ’08.
3. THE KEYNESIAN POLICY SHIFT: Looking beyond cyclical conditions, there is a solid possibility that medium term economic growth will be stronger all over the world than at any time since ‘60s – reason not due to the burst of pent-up demand post-Covid. But instead because maximum employment is more important than minimum inflation for CB / govt. This Keynesian golden age hypothesis has not been seriously considered by other economic analysts or policymakers but the same could be said of the early 80s about the crazy notion that inflation might be permanently eliminated in the coming decade and investment return might be less than 3%!
4. A NEW CULT OF EQUITY: Equity bubble is only a ripple on the surface of a much bigger bubble in government bonds. It’s obvious investors will lose money with owning $17trn of negative yielding bonds, the bond bubble will NOT burst this year with  central banks everywhere committed to Zero interest rate policy ( ZIRP) at the short end of the yield curve & yield control at long end – it does suggest the Fed will try to keep 10-year treasuries below 1.5% so that pre-Covid trading range between1.5% to 3.0% isn’t re-established until the US economy has recovered fully. 

Maybe ’22 bonds move back into their pre-Covid trading range but even then CB will try to ensure that yields rise slowly and in an orderly manner. ie bond bubble will deflate in a slow leak way NOT an explosion. Therefore there will be strong incentive for investors to shift capital from bonds into eq. and other real-value assets in a pattern similar to the cult of eq. that began in the mid-1950s. 

The Government will doubtless try to contain their funding costs by fighting the capital flight from bonds into eq. CB may continue with QE and regulators will continue to req. liability-driven investment in RISK FREE assets. But over time investors / traders will find ways around those rules – for example in 1956 when Imperial Tobacco’s pension fund switched from bonds into equities somehow!

1. RoW: US eq. valuations = expensive esp growth stocks, which are seen as bullet proof – this is not the case for eq. outside the US. Chiller-Type CAPE for non-US markets is lower today than at almost any time since the early 1980s. Outside the US, share px are not much higher today than they were 10yr / 20yr ago. LT eq. returns in the US are almost universally expected to plunge to v. low levels in the years ahead due to mean reversion & to reflect v. low interest rate levels. BUT outside of the US this mean reversion has already happened as has the adj. to very low risk-free returns. In fact, mean-reversion in Europe, Japan and the UK would suggest higher eq. returns in the decade ahead as opposed to the lower returns implied by the over shooting US eq. Therefore the rotation from US to non-US markets that started last year is likely to gain momentum especially after the Nasdaq bubble pops. The same is true for Growth to Value!
2. A predictive bubble: Distinction between extrapolative bubbles and predictive bubbles. The Valuations legacy of social media and big tech may be mindlessly extrapolating the exponential growth of these companies over the past 10 to 15yrs into the indefinite future. This bubble is very similar to the mindless extrapolation of Japan’s post-war growth rates in the late 1980s per the Nifty Fifty growth stocks in the late 60s. Both of these bubbles ended with devastating stock sell-offs with stocks down over 40%.

By contrast, the momentum in other apparently bubble-fuelled assets such as the clean energy sector in Electric Vehicles in emerging markets is not powered by extrapolating past performance. Many of these assets are driven by expectations / predictions / blind hope about uncertain regime changes that may happen in the future as opposed to what is already known about the past / present. These changes are wide and vast; they centre around a global mission to address pressing climate changes but with wide and varying ideas. 

These long-term structural transformations can create predictive bubbles which is how I would describe what happened in the Nasdaq 20 years ago. While the 2000 tech crash wiped out silly businesses like Pets.com and crushed some companies with genuine tech leadership. Investors who kept faith in the technological revolution (and in particular in the  social networking companies that came through the 2000-03 bear market) eventually made up for their losses with HUGE gains through the likes of MSFT/AMAZON/GOOGLE/APPLE.

Something similar will probably happen this time with clean energy / transport. The losses likely in over-hyped companies such as Tesla should be compensated by gains elsewhere in a diversified portfolio of new energy / electrification stocks maybe even including some legacy auto / energy / utility /chemicals stocks that manage to reinvent themselves for the post-carbon era. Same will be true of investments in China and many EMs as the US sanctions push Chinese and  Asian companies to develop their own tech and financial mechanisms that can withstand foreign pressures while growing to compete fully with their western counterparts!