by There’s no question that the current bull market is getting a little long in the tooth. Since 1948, bull markets have lasted an average of five years and the current run has already entered its seventh. There must be a bear lurking around here somewhere, right? There really had been an unusually long period of calm in the U.S. stock market. Until fears about the Chinese economy sent volatility soaring and triggered a worldwide equities selloff in late August, the S&P 500 hadn’t endured a single significant volatility spike in 2015, whereas at least three such spikes have occurred every year since 2009. It seems quite clear why there wasn’t volatility to the upside: After four years without a 10 percent correction, many U.S. stocks were richly valued and investors were wary of buying at the peak, according to Dave El Helou, an investment strategist in Credit Suisse’s Private Banking & Wealth Management (PBWM) division. The downside risk, in other words, was more pronounced. But whereas Credit Suisse believes the volatility that reappeared in August will stick around for some time, the bank does not believe its reemergence signals a bear market. After all, whereas in the past five years the S&P 500 has lost an average of 6 percent in the 1.7 months it took volatility to build into a spike, it has also gained an average of 15 percent in the three months thereafter.
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Ashley Kindergan considers the following as important: Investing: Features
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There’s no question that the current bull market is getting a little long in the tooth. Since 1948, bull markets have lasted an average of five years and the current run has already entered its seventh. There must be a bear lurking around here somewhere, right?
There really had been an unusually long period of calm in the U.S. stock market. Until fears about the Chinese economy sent volatility soaring and triggered a worldwide equities selloff in late August, the S&P 500 hadn’t endured a single significant volatility spike in 2015, whereas at least three such spikes have occurred every year since 2009. It seems quite clear why there wasn’t volatility to the upside: After four years without a 10 percent correction, many U.S. stocks were richly valued and investors were wary of buying at the peak, according to Dave El Helou, an investment strategist in Credit Suisse’s Private Banking & Wealth Management (PBWM) division.
The downside risk, in other words, was more pronounced. But whereas Credit Suisse believes the volatility that reappeared in August will stick around for some time, the bank does not believe its reemergence signals a bear market. After all, whereas in the past five years the S&P 500 has lost an average of 6 percent in the 1.7 months it took volatility to build into a spike, it has also gained an average of 15 percent in the three months thereafter. The Private Bank maintains a 12-month target of 2,200 for the S&P 500, up from 1,953 in mid-September.
The Federal Reserve’s eventual rate hike will likely keep markets gyrating for some time. In hiking cycles since 1987, equity market volatility rose in the first two months after a rate increase, and sent stocks down an average of 3 percent. Plunges tend to be short-lived, however, with the S&P 500 peaking once again an average of 18 months after the initial rate increase. Though central bankers have been hikeding rates later in the business cycle than they have historically done, those increases in rates have largely had the effect of stirring up markets without thoroughly derailing them.
This time around, too, there’s also a supportive macroeconomic backdrop in the developed world. The PBWM division expects global industrial production, flat in the first half of the year, to tick higher in the second. European manufacturing and services activity expanded in August to a level that indicates the Eurozone is on track to record its best performance in more than four years, driven by the combination of an ongoing consumer-led economic recovery as well as continued growth in bank lending. The European Central Bank and Bank of Japan also show no signs of abandoning monetary stimulus, which should support stocks.
Meanwhile, job growth continues at a solid pace in the U.S. The economy added 173,000 jobs in August, a number that many expect to be revised upward next month, just as economists recently revised the number of jobs added in July up to a robust 245,000. The unemployment rate dropped to 5.1 percent in August, the lowest level in more than seven years, and 16 percent of U.S. firms say they plan to hire more workers. The tightening labor market is pushing wages higher even as oil prices remain low and credit expands, creating a positive feedback loop for consumer spending. Once again, history suggests higher rates don’t have to be a menace: The U.S. economy has taken an average of 28 months following previous rate increases to enter a recession.
Recent corporate results suggest stocks in the developed world might have further to run. Seventy-four percent of U.S. companies beat earnings expectations in the second quarter, and consensus expectations for 12-month forward earnings growth have risen from 5.2 percent at the beginning of the year to 7.2 percent as of September. Corporate earnings growth has also improved in Europe and Japan.
Even if the bull market isn’t over yet, Credit Suisse’s Private Banking and Wealth Management division doesn’t believe this is the best time to buy—its analysts have a neutral view on global equities. In the U.S., valuations are still elevated and Credit Suisse’s Global Risk Appetite indicator hasn’t yet signaled a market trough. The bank advocates keeping cash handy for when risk appetite flashes red and more opportunities become available. The bank also expects large-cap stocks to hold up better than small caps through the turbulence.
For investors who want or need exposure to the U.S., the PBWM division prefers large caps to small caps and suggests using options overlay strategies to navigate volatile markets. Covered calls, in which an investor owns a stock and sells calls on it at the same time, put a ceiling on upside, but provide additional income in the event of a flat market and outperform a long-only strategy in the event that the stock declines.
Outside the U.S., the PBWM division is pointing investors away from emerging market stocks, as they are both expensive and vulnerable to the Chinese slowdown. European and Swiss stocks offer the most potential upside. Credit Suisse expects the Swiss franc to weaken against the euro and the dollar in the coming months, which should support Swiss exporters. A positive outlook for the healthcare sector should also benefit Switzerland’s pharmaceutical and health care companies. Gyrating markets may make opportunities harder to find, but they do exist.