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A bull market for more than eight years means we’ve got to be nearing the top, right?

Macrovue analysts don’t think so...

In fact, we believe all this talk of markets “topping out” is mostly fanciful.

Just run your eyes over this quirky chart that’s been doing the rounds on the blogosphere for the past year.

Dow Jones Industrial Average graph Dow Jones Industrial Average graph

It shows the Dow Jones Industrial Average climbing to ever new highs since the 1900s — with relatively few and short-lived downturns.

Though the graphic is intended to be funny, the data is real enough, and it should help put your topping-out fears into sobering perspective.

Still, here’s the understandable concern for some investors.

Markets worldwide have been floating higher — sluggishly and unevenly in some cases — since at least mid-2009, following the global financial crisis.

This year alone has seen double-digit returns for most equity markets in developed and developing countries alike, and in certain places, including the U.S., indices are trading at record levels.

A graph showing the economic tide rising A graph showing the economic tide rising

But here’s why you shouldn’t fret too much about it...

When markets do top out and flip downwards, generally they do so for a reason.

The usual culprits are recessions, falling corporate profits, and central banks aggressively pushing up interest rates.

None of those factors are evident as 2017 winds up, and neither are there signs they’ll rear their heads any time next year.

On the contrary, the world appears entwined in an unusual synchronized economic expansion that — with low inflation keeping central banks at bay — may well flower into the brightest period of global growth in a decade.

Recent U.S. corporate earnings support this optimism.

Some 95% of S&P 500 companies reported in November, with about 72% beating earnings estimates (well above the 62% historical average since 1999) and 68% exceeding revenue forecasts. Even more heartening is that the trend seems pretty much global.


Financial research earnings dashboard Financial research earnings dashboard

Also, while our analysts expect modest U.S. rate rises next year (in 0.25% increments), we don’t see them climbing anywhere near levels that would cause equity markets to sputter.

Not only are markets capable of performing well during periods of rising interest rates anyway, but 10-year treasury rates typically need to exceed 5% before they begin to impact stock prices to a significant degree. Currently, U.S. 10-year notes yield a mere 2.35%.

A graph showing interest rate movements A graph showing interest rate movements

What about valuations?

At 18 times 2018 earnings, the S&P 500 is by no means cheap.

But remember, that number is only 2 points above the 20-year P/E median of 16 times forward earnings. And even at 18, the ratio is well below the peak of the past two decades — basically, 24.4 times forward earnings in both 1999 and 2000.


A graph showing the S&P 500 forward 12 month P/E ratio over 20 years A graph showing the S&P 500 forward 12 month P/E ratio over 20 years

For some investors, the number one concern at the moment is tech stocks, which have spearheaded this year’s rally. But here, once again, the panic is overdone.

It’s true the tech-heavy NASDAQ is up 27% (in USD terms) year-to-date, but valuations when you look at them aren’t really that excessive.

The sector currently has a forward P/E of 21 (roughly the same as its earnings-per-share year-on-year growth rate) compared with, as we saw, 18 times earnings for the broader S&P 500. The 3-point premium is nothing compared with, for instance, the 20-point premium for the sector in 1999 during the height of the dot-com bubble.

What’s been driving the tech sector, pure and simple, is healthy earnings. More than 90% of technology companies that reported third-quarter earnings this year beat estimates, while around 86% guided upwards for the next quarter.

A graph showing the technology market
A graph showing the technology market

In other words, companies growing earnings at 20% plus — far in excess of any other industry group — deserve stronger valuations.

So, at Macrovue, you can see we’re reasonably relaxed about current market levels.

In any case, we’re fundamentally “thematic” investors focused on absolute returns — which means we expect our longer-term themes to play out through multiple business cycles.

At the same time, we regularly assess and monitor stocks in each of our thematic portfolios, or “Vues” so that we're able to take advantage of whatever short-term market conditions present themselves.

But to those who worry the top of the market has been reached and that it’s time to head for cover, Macrovue confidently replies: look at the chart; there is no top.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Past performance is not a reliable indicator of future performance.

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