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Could this bull market be losing steam?
There’s an old investment adage that bull markets never die of old age, with the current market showing signs of cracking just months after the recovery, an industry expert warns.
Could this bull market be losing steam?
There’s an old investment adage that bull markets never die of old age, with the current market showing signs of cracking just months after the recovery, an industry expert warns.
Strong economic support during the COVID-19 pandemic has seen markets around the world rebound.
In investing terms, a bull market is a market that is on the rise and where the economy is sound, while a bear market exists in an economy that is receding, where most stocks are declining in value.
Stocks in Australia that fell by 37 per cent from peak to trough from the pandemic have since rebounded, with the market hovering around record highs, meaning the market went from bullish to bearish, to bullish again, in just 18 months.
However, Kardinia Capital portfolio manager Kristiaan Rehder believes warning signs are emerging, suggesting that the current bull market may not have long to run.
“We remain positive on the market over the next six weeks as we head into a strong reporting season,” Mr Rehder said.
“However, a number of potential issues are accumulating as we enter the seasonally weaker period into September, with bond markets, options markets and the Chinese economy all attracting our attention.”
Bond markets
Investors looking to see if the market will turn again are being urged to watch the bond markets, particularly in the United States.
Record levels of government spending are leading to an increase in inflation rates, which is bad news for asset prices if the central banks are forced to lift rates.
However, while most experts are predicting rates to change fairly soon, the central banks are maintaining a lower for longer mantra.
“The US Federal Reserve is committed to keeping its foot firmly on the accelerator until either employment numbers fall dramatically or inflation accelerates to uncomfortable levels,” Mr Rehder said.
“US headline inflation numbers released this week unexpectedly accelerated to 5.4 per cent year-on -year in June, the biggest rise since 2008.”
The portfolio manager highlighted that one point of data does not make an industry trend, but noted that while the central banks refer to lifts in inflation as “transitory”, investors should keep an eye on the bond markets.
Options markets
Another point of data for investors who are wanting to determine whether the bull market will continue is the options market.
According to Mr Rehder, the options market is currently showing nearly everyone is bullish.
“The options market offers interesting insights, with positioning suggesting nearly everyone in the market is bullish,” he said.
“Implied volatility remains subdued, with the current put-call ratio extremely low, reflecting a heavy skew towards upside participation with little downside protection.
“‘Who cares about protection’ seems to be the belief of the times.”
The investor cautioned that usually when the deck is stacked heavily towards bullish times, it can mean the reversal is even sharper.
China
Finally, Mr Rehder advised investors to watch the Chinese markets, with several indicators said to suggest risks are rising.
“Total social financing, which is a broad measure of credit and liquidity in the economy, has been falling after the Chinese government embarked on a process of deleveraging, allowing the economy to move forward with less stimulus support,” he said.
While the Chinese approach is the reverse of the US, which is continuing to provide monetary and fiscal support, China’s data could be showing weaknesses.
Alan Greenspan famously said in 1973: “It’s very rare that you can be as unqualifiedly bullish as you can now.”
These words were spoken just before two of the worst years for the US economy and the stock market. Could the Australian market be heading for a similar comeuppance?
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