Global bull market
Stock markets around the world have seen a broad-based bull market over the past six months. On top of that, a strong start to the year has augured well for a strong end to the year.
Let's talk more about these themes in this post. Unfortunately, this will be the only one this week, as the week is busy with Nurminen’s ROAST and other urgent matters.
Global bull market
A good start to the year for equities usually heralds a strong end to the year. In the last 70-odd years, only in 1987 did investors receive a beating after the S&P500 index had risen by more than 8% in its first 100 trading days. Otherwise, the stock market has risen on average by 25% over the year. If the same were to be repeated this year, the S&P 500 would climb to 4,800 points. This isn't necessarily the baseline scenario, but it's a fun mind game.
One of the criticisms that the bull market that started in fall (I guess you can already call it a bull market) has received in recent weeks has to do with its narrow forefront. But the rally has actually been much broader than we thought. The bull market is global in nature.
This year in the US, a small number of large companies such as Apple and Microsoft have pushed the S&P 500 index up, but there is nothing strange about that. In the long run, it’s normal for larger companies to run faster. That's why they weigh more in the indices. Equity indices could be described as a momentum strategy where you are always forced to ride the biggest winners.
In addition, smaller companies, which have more weight in the balanced S&P 500 index, and especially the flagship companies in the Russell 2000 index, are more vulnerable to setbacks in an uncertain economic environment. As a curiosity, I might mention that Apple's market capitalization is now greater than the entire Russell 2000 small cap index. This is a good example of how we live in a "winner takes all" economy and such extremes are highlighted.
The Nasdaq technology index has risen by more than 20% since the beginning of the year. After all, some consider a 20% rise to be the limit of bull market, although of course for the long-term investor, who will inevitably face down and up cycles over the years, such a classification is irrelevant. However, the index that was in a bubble is still 20% lower than the late fall 2021 peaks.
As a curiosity, there was less talk of recession on the Q1 earnings call for the fourth quarter in a row. Almost half of the companies in the S&P 500 index talked about a recession in the second quarter of last year, while now just over a fifth mentioned it. Judging by stock market developments, investors' fears of a recession also peaked at the end of last summer.
Here is also some interesting data on mentions of recession by industry. Less surprisingly, a higher percentage of companies in the financial and real estate sector mentioned recession than in other sectors. Only a few percent of technology and healthcare companies were talking about a recession.
More market commentators are focusing on the US, which accounts for more than half of the value of global stock markets. But the bull market is more clearly visible in other parts of the world. Germany's DAX index has just made new all-time highs, and other European stock indices aren’t far from their peaks either.
So far, the eurozone has got away unscathed with the energy crisis. Economic growth expectations for GDP growth this year have been revised to 0.6%, instead of the slight contraction previously expected.
In addition, the fall in earnings seems to be lagging behind, at least in the analysts' consensus forecast, for the time being. The forecast 12-month forward-looking result for the STOXX Europe index has started to rock up after a six-month pause. Of course, forecasts are always forecasts and they tend to be chronically optimistic, but it’s at least a little promising when those who make forecasts for a living see growth on the horizon.
In the wake of Warren Buffett's share purchases, investors are rejoicing in Japan, where the stock market has risen vertically in recent times. The index is still below the 1989 bubble peaks. This graph is a stark reminder of the dangers of stock bubbles. It took 20 years for the Japanese stock market bubble to burst in the down market, and it hasn’t still recovered fully.
In India, which has become the world's most populous country, stock markets are hovering near all-time highs. After all, India has been a real multibagger factory. At the beginning of the year, I went through the results a study about stocks that have returned over 1,000% in the last 10 years and as much as a fifth of these stocks came from India. The Indian stock exchange trades at around 20 times its earnings, but I think that this high a valuation stems from the strong earnings growth and good profitability of Indian companies.
Despite the broad rise, there are still some flatlining in the world. On the other side of the Himalayas, share indices in China, the world's second-largest economy, are going horizontal. So far, China's economic recovery has proved sluggish and, for some reason, the market oppression by the country's Communist Party has not helped sentiment. The stock exchange is trading at around ten times its earnings, so if you believe in a more investor-friendly future, China is worth watching. In general, the stock market index for the whole of Asia excluding Japan has been going flat in the wake of China.
A more familiar flatliner to the Finnish investor is, of course, Nasdaq Helsinki, which has not caught the glee of the rest of the world. Nasdaq Helsinki’s general index is driven by large companies. Nordea, the most valuable company on Nasdaq Helsinki, is suffering from the gloom caused by the spring banking crisis, the Swedish real estate market and apathy caused by recession fears. Neste's biofuels, which have brought huge growth, face the electrification of road transport, although aviation biofuels are expected to be a new driver of growth. KONE, worth 26 billion, suffers from the cooling of the Chinese real estate market. Nokia is Nokia. Sampo's valuation is tight, although a large amount of money has been transferred from the company's cash to investors' pockets, which of course puts pressure on the share price. Forestry companies flatline in a difficult market. However, our machinery companies are doing well, but perhaps Nasdaq Helsinki could do with a new growth boost for large companies.
Despite the rise in stock markets, valuation levels aren’t that demanding. Of course, the US market is high multiples-wise, but this can be explained by the faster growth and better return on capital of US companies, which are key value drivers for equities. These drivers are a little all over the place in most other parts of the world, but you can’t call the valuation difficult. Of course, these multiples also rely on the realization of earnings expectations, which is always uncertain. If you do not believe in the sustainability of the profitability of listed companies, you should not join these ATH parties.
I might also mention that sentiment has also remained benign for the market. Namely, portfolio managers are still pessimistic. This graph combines portfolio managers' views on global economic developments, cash weight and equity allocation. They are at very low levels, which historically has been a good buying point. Of course, going against the sentiment isn’t automatically very original or a shortcut to happiness, nor is it a substitute for thinking and valuing companies on your own.
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