Are the bulls finally running out of energy?

You’ve heard the story before: on August 9 2007, French bank BNP Paribas froze $US2.2 billion of money-market funds. Many consider that day the start of what we now know as the global financial crisis (GFC).

Over the next 18 months we saw share and credit markets tumble. The world economy experienced the worst recession since the 1930s.

Ten years on and following sustained strength in sharemarkets and economies since 2009 it’s worth reflecting on just how much longer the current expansionary phase can continue.            

"How much longer the current expansionary phase can continue?”

If we look at the United States, the current share bull market and economic recovery is approaching the decade-long run of the 1990s. The annualised return for the S&P 500 has also been very strong despite slower economic growth.

Long bull markets in shares have been a feature over the past three decades, compared with the volatile 1970s and 1980s which faced shocks from higher oil prices and inflation.

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Note: The table shows the average length of recovery in the US share market and economy by decade. Source: Bloomberg, ANZ Wealth

How much longer can it go on? To get a guide to the vital signs of this sustained bull market we have put together a check list of indicators which have historically flagged an approaching end to such buoyant markets and presaged recession.

Invariably, these indicators illustrate the end of a bull market is marked by a combination of imbalances such as high debt and excessive confidence.

Far from stretched

Current valuations overall are less extreme than previous market peaks. While global share market price earnings ratios are above average, across a range of measures valuations are still well below that reached in 2000 and, for some measures, 2007.

Bond markets are not indicating an imminent market peak either. The yield curve is still positive while credit spreads are low and have not begun to rise which typically happens as a downturn approaches.

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Sources: Citi Research, Bloomberg, ANZ Wealth


Sentiment indicators are positive but not at an extreme level which would suggest excessive exuberance and an imminent market peak.

While global equity inflows have been strong, New York Stock Exchange data on the growth in margin debt data remains relatively subdued at 14 per cent growth, whereas 50 per cent is a typical market peak level flagging exuberance.

Individual investor market sentiment as measured by a survey by the Association of American Individual Investors (AAII) is only at average, not an elevated level.

However, there are emerging signs of risks in high debt/low unemployment. Corporate behaviour indicators only have one indicator flashing red – net debt of the US corporate non-financial sector.

The reading of 1.9x earnings puts debt above the previous two cycles. But other indicators such as CAPEX, mergers & acquisitions (M&A) and initial public offerings (IPOs, or share market floats) remain restrained.

These are consistent with what we found for individuals with their margin loan debt levels: so far there is not the typical surge characteristic of an approaching cycle end.

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Sources: Citi Research, Bloomberg, ANZ Wealth

Red light

For economic indicators, the current US unemployment rate of 4.3 per cent is flashing red, suggesting end-of-cycle risks from high inflation and tight monetary policy.

But our lending standards indicator (a high reading is tight, low is easy) suggests we are far from this point with banks supportive of the expansion and markets. Plus, inflation remains below 2 per cent and not threatening to go much higher anytime soon.

While the current investment and economic cycle has been lengthy, we don’t see enough typical signals yet to suggest an end is imminent.

Valuations still have further to go if history is to repeat, sentiment is far from exuberant and corporate behaviour is restrained. However, there are risks beginning to emerge as US corporate debt has risen and low US unemployment flags rising inflationary risks.

But every cycle is different and so we need to keep an eye on what may be different this time. In terms of financial and economic risks, at the top of our list is China due to its increased indebtedness since the GFC.

With the increased importance of emerging markets, including China over the past decade, this trend may well be the source of the next major market shock - although there are no signs of this at present.

Mark Rider is Chief Investment Officer at ANZ Wealth

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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