The US market is a lot cheaper than it was but it has not fallen far enough to convince all investor...
The US market is a lot cheaper than it was but it has not fallen far enough to convince all investors that the bear market is over. Andrew Smithers, analyst at Smithers & Co, says past bear markets have invariably taken the stock market down to a level at which investors can then receive markedly above-average returns.
However, he argues it is unlikely this has yet occurred because long-term returns are still well above average from most starting points, implying significantly below-average returns in the future.
Smithers believes this latest rally resembles the temporary upswings seen in the early phases of past bear markets. He says: 'The bull market was driven by corporate share purchases, which were in effect large cash distributions to shareholders. As these contracted, the market fell. The recent recovery has been accompanied by a pick-up in corporate buying, but this cannot be sustained because profit retentions are now negative and leverage is high.'
At its peak the market was nearly three times overvalued and while it has already fallen by a third, Smithers argues that to be fairly valued it needs to fall by as much again.
He says: 'If the market was to fall enough to be as cheap as it was in the trough of 1974, the market could still lose 60% of its current value. We can't be sure the fall will be so severe, but if it is not the US market will achieve the softest landing it has ever had.'
However, following the most extreme bull market the US has ever experienced, Smithers believes it would be wrong to assume such good fortune.
Conversely, Rupert Della-Porta, US fund manager at F&C, says in the medium-term the US stock market is looking good as it is being propelled by the extreme liquidity being supplied by expansionary US fiscal and monetary policies.
He argues the US attempt to reflate the economy will have a positive impact on earnings and he adds with interest rates on a 40-year low, US stocks are now looking attractively valued compared to bonds.
As a result, he expects that over the next 12 months the US market will move even higher.
However he says this is not the start of a long bull run because with price earnings being as high as they are now, he argues there was never a bull market to start with. Normally, he says, bull markets begin on P/Es of 14-15 times.
He adds: 'For a bull market to begin we need to see stocks become cheaper and the debt structure of the economy to improve, especially in the corporate sector. While there has been some cost-cutting and restructuring, debt only looks better because of the lower bond yields.'
Della-Porta also believes there needs to be a greater degree of pessimism in the market, as this is when bull markets traditionally begin.
Consequently, Della-Porta argues that while the US stock market will go up over 12 months, after this point it will get stuck because of corporate and consumer debt and higher valuations.
High valuations mean it will take some time for earnings to grow into their current prices, another point against returning to a bull market, according to F&C
US stock market should go up over next year.
Monetary stimulus has kept the market liquid.
Interest rates likely to remain low.
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