Workers pass the bull in New York’s Financial District.David Karp/The Associated Press
Five years and all is well. That's the takeaway from Michael Hartnett's note marking the fifth anniversary of the bull market on Thursday.
"We believe the bull market is far from over," said Bank of America's chief investment strategist. "Neither inflation nor recession features in our macro base case. High corporate and investor cash levels are more visible than greed and leverage. And central bankers remain in 'whatever it takes' mode."
The upbeat take lands five years to the day that the S&P 500 touched an intraday low of 666-and-change, marking the bottom of the bear market and the start of the bull. Since then, the U.S. benchmark index has risen 182 per cent and notched 49 record highs – 50 if Thursday's gains hold.
Of course, investors are more interested in the future than the past, and so Mr. Hartnett – drawing on the past – outlines why the market looks far from overheated now.
His main point: "We believe this remarkable bull market in equities has been built on liquidity and pessimism, not on growth and optimism."
He means that the backdrop hasn't been so great. In terms of economic strength, U.S. gross domestic product has averaged just 3.3 per cent over the past five years, in nominal terms, near the slowest rate of growth since the 1930s.
In place of stronger economic growth, the U.S. Federal Reserve has opened the taps on liquidity, with ultra-low interest rates and its monthly bond-buying program, known as quantitative easing.
In terms of fund flows, investors have far preferred bonds over stocks, suggesting that the stock market is hardly over-owned: Since the start of 2009, $132-billion (U.S.) has flowed into global equity funds, versus $1.2-trillion into global bond funds.
The move into stocks, or what Mr. Hartnett calls the Great Rotation, should gather speed as economic growth picks up and central bank liquidity is withdrawn.
However, he makes the point that the five-year bull market can be broken into two distinct phases. Phase 1 was marked by considerable skepticism about the economy, with investors preferring so-called quality stocks that guaranteed them earnings growth and a steady dividend.
Phase 2, he argues, started in late 2011, when the U.S. housing market showed definite signs of recovery and investors began to believe that the economic recovery was real.
"Leadership flipped from corporate bonds to corporate equities, from emerging markets to developed markets, from gold to real estate, from staples to banks, and so on," he said. "Our base case is that this phase will continue as growth picks up and liquidity is slowly withdrawn. A strong rally in the U.S. dollar should mark the completion of The Great Rotation."
David Berman