We Are Not Changing Our Bullish Tune
By
Murray Leith CFA, Executive Vice President & Director, Investment Research
Tuesday, January 06, 2015
Equities have had a bad start to the year and a number of strategists are saying that stocks could continue to struggle. Indeed, Bill Gross, who formerly ran the world’s largest bond fund at Pimco, declared “the good times are over” in a recent memo. While he holds out hope for high-quality assets, he says, “When the year is done, there will be minus signs in front of returns for many asset classes.”
The pervasive bearishness of market pundits is welcome, as sentiment is often a good contrary indicator. When investors expect the worst, the odds are good the economy and stock market will pleasantly surprise.
While most agree that the U.S. economy will accelerate in 2015, there is little optimism about the outlook for the rest of the world. China is slowing, as its debt-driven investment mania is coming to an end. Europe is stagnating because its economies have yet to benefit from more stimulative monetary policies and less restrictive fiscal policies. Oil exporting nations will soon feel the pinch from sharply lower oil prices.
We certainly are not anticipating global growth to be wonderful in 2015. Still, economic growth will likely be better than expected. The massive drop in the price of oil and significant reduction in global interest rates will have a stimulative influence on the world economy.
Investors always forget that there is a meaningful lag before changes in energy prices and interest rates have an economic influence. Moreover, the boost from these factors could be greater than normal, considering the magnitude of the declines. The price of oil is less than half its peak last summer. The yield on German 10-year bonds has fallen from close to 2% a year ago to less than half of 1%. The yields on comparable bonds in Italy have fallen from 4% to less than 2% over the same period, while the yield on Japanese 10-year bonds has fallen all the way to 0.3%.
With stock prices falling and bond prices rising, markets are behaving as if a recession is around the corner. However, recessions typically follow spikes in oil prices and interest rates, not reductions. Consequently, we believe fear of a global recession is misplaced. Instead, we believe the global economy will follow the same muddle-through path that it has since the recovery began in 2009.
A slow-growth, non-inflationary world may not be the ideal circumstance for all stocks, or stock markets in general, but we still believe it is a good environment for the shares of the high quality businesses that we favour.
The future is always uncertain and there may be unsettling events in 2015. Yet, it is our experience that it is best to stick to one’s long-term investment plan and maintain exposure to good businesses. As always, there will be plenty to worry about in the years to come, and the stock market will remain volatile, yet we have little doubt that quality businesses will survive and thrive.
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