|McAlinden Research Partners||
They say 70 is the new 50. Humans are living longer and healthier lives. Perhaps that life extension expectancy can be applied to another enigmatic species – the equity bull market. In the ten cyclical stock market expansions since the end of World War II, the average length was 57 months. The current one is now slightly over 60 months old, so it may look kind of long in the tooth.
But like humans, over the past few decades cyclical stock market expansions have been lasting longer. During the first five of those ten bull markets, the average duration was just 47 months, but in the more recent five it has been 68 months, with the longest running for 113 months. So in the same sense that old-is-still-young for Homo sapiens, this bull market may have a lot more to go.
Many pundits wax eloquently about how the five-year rise in share prices was nothing but an artificial bubble that is set to burst. But the Fed’s printing presses have been doing more than inflating stock prices. Monetary easing boosts real economic activity through multiple transmission channels with long and variable lags. Over time, that stimulus raises corporate earnings and dividends, which in turn increases enterprise values.
The rise in earnings and dividends has provided the fundamental support for the rise in stock prices: Earnings have more than doubled from the 2009 trough, while dividends have soared. As a result, valuations in the U.S. equity market are not out of line.
Furthermore, earnings and dividends will continue to expand as a result of accelerating U.S. economic growth. The case for stronger GDP numbers is based on our belief that the housing sector will be a late bloomer. Typically, residential construction is an early-cycle source of strength. This time, the U.S. housing upturn has been late to the party, temporarily hijacked by a run-up in mortgage rates last summer and the tough weather this past winter.
Some analysts view any housing recovery as temporary; we strongly believe it is the start of a multi-year process that will boost GDP growth numbers for some time to come. The spillover effect into the rest of the economy will contribute to further gains in earnings, dividends, and stock prices, supporting the current bull market run. That is, until rising inflation forces the Fed to raise short-term rates substantially above the inflation rate. There is most likely a long way to go before that happens.
Until then, investors will find the best opportunities in areas where discontinuous change is currently unfolding, and providing a supportive environment for certain groups of securities to outperform. Following are two such examples:
Housing: One of MRP’s longest-running themes (launched November 3, 2011,) the cold winter interrupted the US housing recovery, with sales and construction just recently beginning to thaw. Pent-up demand from population growth and replacements continues to build and now is close to 5 million units. While the population has continued to grow, household formations have been depressed. We believe it is cyclical and will bounce back as the broader economic recovery re-accelerates and employment growth continues to pick up. While the homebuilder stocks remain under pressure and are lagging the broader market, we believe they will price in the stronger housing recovery that unfolds through the rest of the year. We also expect to see renewed strength in financials (mortgage servicing, loan origination), paper and forest products (lumber), and consumer durables (white appliances, carpeting, etc.).
Tobacco: Some small innovators are laying the groundwork for the big tobacco companies to turn their industry around, even as the global crackdown on smoking nicotine continues. All of the major tobacco companies are expanding into the e-cigarette and vaporizer market, to “get on the right side of history,” as one company official put it. Consolidation is being hastened by new regulations that many countries are adopting. Meanwhile, a new opportunity is showing up on the distant horizon: the trend toward legalization of marijuana is gaining momentum for commercial, recreational, and medical uses; in the fullness of time, the major tobacco companies are well placed to expand their business lines. As with e-cigarettes, they have the necessary distribution network, economies of scale, and regulatory experience. Launched October 2, 2013.
To learn more about MRP’s investment themes, process, and how to subscribe, please call Rob Davis at 646-964-6152 or email firstname.lastname@example.org.
McAlinden Research Partners (“MRP”) specializes in identifying actionable investment themes early. The firm provides daily, weekly and other periodic reports on the economy and markets. MRP’s team is headed by Joe McAlinden who has over 50 years of investment experience. Prior to founding MRP and its parent company, Catalpa Capital Advisors, Joe McAlinden served as chief investment office at Morgan Stanley Investment Management, where he oversaw $400 billion in assets.
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