According to an old investing adage, bull markets “climb a wall of worry”. That means that markets tend to grind higher in an environment laden with risks. Only once all apparent risks are in the rearview mirror, and everyone is bullish, does the market reach its peak. The “wall” that the current bull market has scaled to this point include worries about a double dip recession, a European banking crisis, fed rate hikes, a slowdown in China, and unpredictable politics. 2019 has seen renewed fears about trade policies and a global slowdown establish new bricks in this wall of worry. Our process acknowledges the myriad of risks in the market today, but concludes that the market is likely to continue higher.
Company earnings are the key driver for stock prices, and the current earnings picture is mediocre. Earnings have grown 2.6% so far in 2019, and are expected to grow 3.1% over the coming year, according to data from Factset and Credit Suisse. A look beneath the surface, however, suggests the picture is slightly better. Revenue growth is in the 4-5% range, and the median company has grown revenue by 6.6%. Some company-specific issues among the largest companies skew the average data slightly. Overall, near term earnings growth is uninspiring, but hardly suggests that a bear market is near.
As for much of the last five years or so, valuations are slightly above their historical averages. However, they remain far below the valuations typically found at stock market peaks. More importantly, when factoring in current interest rates, stocks are actually cheap compared to bonds and cash. Again, while valuations are not compelling, they should not deter one from investing.
According to data from Lowry’s Research, bull market tops have always been proceeded by a deterioration in the forces of supply and demand beneath the surface. At present however, the broad measures of supply and demand do not indicate any deterioration; instead they suggest that the current uptrend remains healthy.
Now is not the time to run from the markets nor is time to take undue risk in search of returns; rather one should ensure that one’s asset allocation is appropriate and be patient. As legendary investor Peter Lynch once wrote, “more money has been lost waiting for a correction to happen than has been lost in the corrections themselves”. Having a process to manage risk is particularly important in today’s environment. But being prepared for a ‘melt-up’ in the market should current fears subside is at least as important as being prepared for a meltdown.
