9/7/2020 12:00:00 AM

Market Watch Episode 46: Welcome to the new bull market

It's official, the bull market is back.

"We recently eclipsed the old highs from February 2020 so we can officially say that we are in a bull market," says Pie Funds chief executive Mike Taylor.

We'd only just finished the world's longest-running bull market - that began with the GFC and finished in February 2020, Taylor told the Market Watch video show.

Now we've just experienced an extremely short bear market, which really only lasted about a month, he said.

The technical definition of a bear market is one that has fallen more than 20 per cent.

A new bull market is one that has eclipsed the old highs.

Wall Street benchmark S&P 500 index and the tech-heavy Nasdaq index went into record territory this week.


Mike and the NZ Herald’s Liam Dann discuss the latest market conditions, post Covid-19.

US stocks are up about 55 per cent from their lows in March.

New Zealand's NZX-50 has made similar gains.

"Many thought that what we have experienced since March was simply a bear market rally, that we'd simply roll over and go lower again," Taylor said.

That's not to say that the market won't have some sort of correction from where it is, but the rally has not stopped, he said.

The two big drivers of the new bull market are central bank policy, which has sent interest rates to record lows and flooded the market with cash and then there is the tech revolution, which has been accelerated by the pandemic.

That's proved a powerful combination for investors.

"We've seen a switch to the digitisation of the global economy," Taylor said.

"We've seen an acceleration of the switching to online retail. There've been winners and loser in that and the winners have tended to be the big tech, the Amazons the Apples and so on."So what's happened is the earnings of those companies have gone up. Then we have had interest rates fall, which has caused the [earning] multiples to go up."

Interest rates are now 1.5 to 2 per cent lower than they were pre-Covid, which was stimulating everything from equities to house prices and gold.

On top of the monetary policy stimulus there had also been a large amount of fiscal stimulus from government - which in some cases was putting money into the accounts of those who can afford to spend and invest it.

"We are seeing people spend the money that they are getting," Taylor said.

This combination has changed the shape of the new bull market relative to the last one.

In terms of the equities themselves, the big difference between the old bull market and the new one was that there had been a narrowing in the range of "leadership" stocks, Taylor said.

"Leadership is those big tech companies around the world, it's not as broad-based as it was. And that can cause people to be a bit nervous."

The valuation discrepancies between the big tech companies and the big banks and other more traditional companies - like those on the Dow Jones Industrial Index - was now quite large, Taylor said.

There was an argument that the so-called "value stocks" were actually undervalued right now, he said.

But, broadly, investors had set their sights across the next 12-18 months, which were going to be difficult times for the real economy.

"People are looking through to 2021," Taylor said. "With many cases with the tech businesses you don't need look through because they already [have] accelerated their growth rate so they are actually already better right here and right now."

So what next? Can it last?

A couple of big variables are on the horizon, Taylor said.

One of those is the US elections.

Democrat contender Joe Biden remains ahead in the polls but the race had been tightening as it did in 2016, Taylor noted.

Markets would likely see Trump as supportive although a counter to that was the instability that Trump might bring to global trade.

Another big variable was how the pandemic actually played out.

There was now some hope in the financial sector that a vaccine will be available next year, Taylor said.

How effective that vaccine is remains to be seen.

"But what it would do is give people a sense of certainty and comfort that you could have a Covid vaccine a bit like the flu vaccine and get back to some sort of certainty and normal life."

Meanwhile, how long this bull market lasts will depend a lot on what central banks do.

"Typically in the past couple of decades the end is because interest rates start to rise," Taylor said.
"We saw that in the late 90s and in the mid-2000s and this time around. Even without Covid the market might have had a correction anyway.""I think there is a bit of time left. I wouldn't go with 10 years but one could expect that markets will remain buoyant until such time as interest rates start rise again."

- MarketWatch is produced with support from Pie Funds.

- The Market Watch video series is produced in association with Pie Funds

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