As with any bull market, the older market historians begin to sound the alarm bells well before the peak, alarm bells that are typically ignored by the masses. After a significant market correction, history is written terms of the financial damage caused but there is rarely consensus as to why bull markets end.
History records mania’s as the end of record bull markets; whether it be tulips in 1637, South Sea Bubble of 1719-20, the Dow Jones collapses in 1929 and 1987, the Nikkei in the late 1980s, the dotcom bubble of 2000, or the GFC driven by US property markets in 2008.
While the names of the assets change the psychology of a mania remains the same, yet there is no commonality to what ends a bull market other than the ringing of a mythical bell.
History provides examples of what could happen as stocks that appear bullet proof can suddenly become vulnerable. Whilst Apple’s share price had risen 10-fold between 1998 and 2000 it was no dotcom darling, Apple had actual earnings. Yet when it warned it would miss earnings in late 2000 the stock plummeted over 50% in a day.
Apple shares July 1996 to Jan 2001.
Amazon had its doubters back in the late 1990’s. While my early adoption of online shopping may have led me to believe that I had one up on Wall Street, their stock did fall by 95% from 2000 to late 2001.
Why does this matter? Because asset prices do not travel in a straight line and 2020 provided a perfect example of this. The more expensive prices become the more likely they are to correct. Significant increases in volatility are almost always associated with trend-ending bear markets, but not in 2020.
Wall Street firms will almost never forecast a major correction. Today’s thematic of 'lower rates forever' will persist over multiple years. In fact, thematic commentary adjusts even when the theme is losing momentum. We have all been told that we are on the verge of strong growth with exceptionally low rates; an investing utopia. The fact that rates are moving significantly higher is for the moment ignored. Note the chart showing US 10-year rates vs the S+P.
“This time it’s different” is often described as the most dangerous four words in investing, however this time some things are different (as they usually are). This time we have already had the stimulus; Central Banks and fiscal stimulus have fueled an asset rally post the global pandemic.
For mine, this is the real difference; policy options are virtually exhausted and if asset prices correct significantly it may be sometime before any additional monetary stimulus is delivered. The effectiveness of endless QE should be questioned if Japan is to be used as a case study. The closer we are to the end of the pandemic the less likely further monetary and fiscal accommodation will be. Central Banks are, for the moment, omnipotent and yet may turn out to be impotent if growth falters.
“In the midst of chaos, there is also opportunity” Sun-Tzu
tomorrow’s great companies can suffer significant share prices corrections and even the best of stocks will be impacted by earnings’ misses.
It is not possible to completely future proof a portfolio, but it is possible to diversify by looking at asset classes that have not benefitted to the same extent as listed equities from recent policy. A portfolio should be a buyer of undervalued assets and a seller of overvalued assets. Classically put, “buy low sell high”.
Bull markets tend to overshoot all predictions, however strapping in for the ride and hoping to bail out quickly when it’s over is not the most prudent nor sustainable strategy. Reducing exposure to overvalued assets whilst adding undervalued assets is a more prudent approach.
Beckon offers the opportunity to invest in the SME sector, the sector most beaten down by the pandemic. This is a market sector where you will be buying low by adding sustainable investments at attractive multiples.
David (Bushy) Nolan
Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)