While some of the bears are starting to emerge from a long hibernation, MWG is still firmly in the camp of the bulls, despite the six year run being the fourth longest bull market in history. We expect the spring and summer to shed even more sunshine on the markets. Many market pundits continue to wag a foreboding finger about the cyclically adjusted price to earnings (CAPE) ratio, the Shiller-P/E, Tobin’s Q ratio, and other signs that signal a market top. We won’t bother to bore you with the details of these various metrics. According to Savita Subramanian, Equity Strategist at Bank of America Merrill Lynch, “When investment strategists have been this bearish in the past, the S&P 500 rose 98% of the time, with average gains of 27%.” While the markets are certainly richer than in the recent past, we believe there is significant room for greater share price appreciation. When the markets do check back (and they will), we would view that as a nice opportunity to buy.
Our work suggests there is no imminent end to the current bull market, despite the fear-mongering of some of the bears. First of all, interest rates remain low. In fact, in many countries, including Canada, interest rates have recently been cut yet again. In the US, the Federal Reserve remains undecided, but given recent jobs data, is unlikely to raise rates until late in 2015, and even at that, the pace of interest rate hikes needs to be relatively gradual to sustain the strong recovery. In today’s environment, consumers and businesses can borrow at near-record low interest rates, which should continue to stimulate the economy. Corporate balance sheets and profits remain strong. The bottom line is that investors looking to grow their portfolio in a low interest rate environment should still prefer equities. Simple supply and demand should dictate that share prices will continue to rise. And cash levels remain high, with the only home for it being equities, in our view.
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