LeggMason Investors is calling the start of the next run in the US bull market. Robert Hagstrom, sen...
LeggMason Investors is calling the start of the next run in the US bull market. Robert Hagstrom, senior vice president with the group, believes all the conditions are in place for the US index to start rising again.
'The end of a bull market tends to happen when profits are peaking, inflation is accelerating, the Fed is raising interest rates and stocks are significantly overvalued,' he said. 'We argue that we are coming close to a period when profits are rising, inflation is stable or in decline, the Fed is lowering interest rates and stocks are significantly undervalued.'
Analysts Ed Kerschner of UBS Warburg and Tom Galvin of Credit Suisse First Boston have identified six periods in the past 20 years when the S&P 500 was undervalued by more than 20% relative to bonds, cash and Treasuries.
These were 1981, 1982, 1984, 1990, 1998 and December 2000. In the first five of these, the market's subsequent performance over 12 months ranged between 4%-38% and, over 24 months, between 25%-59%.
Hagstrom said: 'Twenty-four months out, something nice is going to happen.'
During 2000, the S&P fell 9.1% in dollar terms and, during 2001 to the end of April, it has returned -5.05%. LeggMason points to only three previous periods of back to back negative returns from the S&P.
The first, 1929-32, coincided with the depression, the second, 1939-41, was during the war, the third, 1973-74, took place during the oil crisis, Watergate, a rise in inflation and a war in the Middle East.
Hagstrom said: 'Compared to these, we just do not see a problem for the market and for companies today.
'The Fed has cut rates and is on the market's side but the economy has not caught up so we are in an intermediate period. Sooner or later, a company will surprise on the upside and the market can then get going.'
Hagstrom is one of a team of four led by Bill Miller responsible for $13bn in US equity assets at LeggMason.
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