Back in January I wrote that rising longer-term bond yields could eventually become a threat to share prices. This prediction was accurate but also inevitable, with expectations of an economic recovery, it was likely that bond yields would rise, and with rising yields, the stocks trading at the highest levels would be threatened.
So, is this the beginning of the end of the 10-year bull market that has formed since the GFC?
I don’t believe so.
In a more recent update, written at the start of February, and before the mid-February peak of the S&P 500, I wrote that this could be the year that focus returns to value stocks. Rather than the overall share rally continuing to be driven by tech stocks trading on ludicrous multiples of earnings, further gains would come from cheap, mature, and profitable businesses in the more traditional sectors of the market.
Since then, though prices have been volatile, our value sectors in the banking and materials spaces have continued sideways to higher.
For a market to fall, you usually need to see some sort of negative economic catalyst that triggers the selling.
The economic outlook at the moment is the most positive it has been for some time, and we are at an unlikely point in the economic cycle to fall from.
In the short-term, the average stock price, as shown by a stock market index such as our XJO index, could come down a bit further; after all, selling is highly contagious. However, there are stocks that are trading on just a few years of earnings, and with the economy and earnings expected to grow further, it will be hard for these stocks to come off too much.
We are likely witnessing the beginning of a rotation out of ultra-high valuation stocks, to more traditional stocks trading at attractive values.
A threat to this view is the divergent fiscal policy settings from China. At their recent National People Congress, the Chinese Government outlined a plan for a more conservative economic growth target with a view on reigning in the Fiscal deficit.
With the Australian economy heavily reliant on the Chinese economy, economic tightening there could lead to stock market jitters here. Still, strong growth is expected, and strong demand for Australian goods and services is likely to remain.
When trying to identify if a stock remains good value, or whether the share price is based entirely around future expected and/or speculative growth, you have to look at the numbers. Our emeraldequities.com.au platform provides this and any other data point you need. If you’d like to discuss our platform or any ASX listed stock, please contact an Emerald Advisor on 03 8080 5777.