Elisabeth Dellinger
The Big Picture

62.5 Reasons to Be Bullish

By, 08/22/2013
Ratings203.85

Why stop at 62 reasons to be bullish when we could give you 62.5? Photo by Greg Fiume/Getty Images.

The bull market turns four and a half next month, and investors everywhere seem to think it’s a bit too long in the tooth—and must soon die of old age. Don’t believe it: Bull markets die for many reasons, but age and magnitude alone aren’t among them. New bear markets usually need diminishing fundamentals that go unnoticed by euphoric investors—and some big, bad, underappreciated development. Today, we have the opposite—investors’ expectations are still rather dim, and reality looks set to surpass them on multiple fronts. Here are 62 (and a half!) reasons why.

  • US earnings are broadly growing and beating expectations—especially in less cyclical sectors. (As of August 16, 462 companies had reported Q2 2013 earnings, and their growth rate was 4.7% y/y. 67% beat analysts’ estimates, an above average clip.)
  • With earnings rising, US firms can spend on growth-oriented endeavors without depleting cash reserves.
  • And they are spending—business investment is near all-time highs and rising.
  • UK businesses are investing, too—for the first time in over a year.
  • And a recent survey of UK manufacturers points to higher R&D spending looking forward.
  • With 462 companies reporting as of August 16, S&P 500  revenues grew 2.1% in the quarter—higher for less-cyclical sectors--suggesting demand is firm.
  • US retail sales are high and rising—more revenue growth ahead.
  • UK retail sales are rising even faster!
  • P/E ratios, though slightly above average, remain well below levels typically seen during late-stage bull markets—investors aren’t yet putting a high value on companies’ future earnings.
  • Corporate balance sheets are healthy and flush with cash—fodder for stock buybacks.
  • With IPOs and new offerings sluggish while buybacks and M&A accelerate, stock supply is constrained.
  • While nascent, bank lending is improving, on balance, around the world—capital is circulating.
  • Most yield curves globally are positively sloped.
  • The US yield curve is steepening.
  • So is the UK’s yield curve.
  • And by year-end, most UK banks should have finished raising capital to comply with the early Basel III phase-in—potentially bullish for lending in 2014.
  • Most US Financials’ balance sheets are capitalized above forthcoming Fed requirements, positioning them well to continue supporting economic growth even as new rules take effect.
  • The Fed’s contractionary quantitative easing (QE) seems to be set to slow.
  • Most people see QE backward and fear its end—false fears are bullish!
  • The UK’s economy has accelerated post-QE—bullish precedent for the US once the Fed starts tapering.
  • The dreaded sequester hasn’t visibly dented the US economy—private demand and investment are more than offsetting government cutbacks.
  • Congress is gridlocked, reducing the likelihood of extreme legislation.
  • The US administration remains distracted by scandal, further reducing the above.
  • Many bilateral and regional free-trade talks are progressing—stocks love free trade.
  • Meanwhile, minor spats like the EU and China’s tiff over solar subsidies and the Crimean trade war have been resolved.
  • Passenger air traffic is accelerating globally—which wouldn’t happen if folks were struggling. Vacation and business travel are discretionary.
  • Freight air traffic is accelerating, too—more goods are moving around the world! Another example of discretionary demand growth.
  • Intermodal rail freight shipping volumes are rising in the US.
  • Taiwanese exports are rising, suggesting global demand for semiconductors and other high-tech components is strong.
  • US manufacturing and services PMI surveys are advancing, with the very forward-looking new orders component showing particular strength.
  • Ditto for the UK.
  • And Germany.
  • US wholesale inventories have fallen three straight months, suggesting firms can’t keep up with rising demand.
  • Because inventories are down, firms will have to restock, which should boost manufacturers.
  • This is true in the UK, too!
  • US housing starts, home sales and prices continue rising—a small, underappreciated economic tailwind.
  • UK housing markets are rebounding, too—and most observers interpret this good news as bad.
  • Ditto for the rebound in UK mortgage lending.
  • Leading Economic Indexes globally are high and rising—typically, recessions don’t start until LEI has fallen for some time.
  • Eurozone growth resumed in Q2, sooner than many anticipated.
  • So did French growth.
  • And Portuguese growth! Even the troubled periphery is working its way back.
  • Speaking of the periphery, PIIGS yields remain tame despite political uncertainty in Portugal, Spain, Greece and Italy.
  • Spain’s economy is showing signs of life.
  • Ireland appears on track to exit its bailout later this year.
  • Greece might need a third bailout, and most folks aren’t panicking—regional sentiment is improving.
  • Regardless of who wins Germany’s upcoming election, it’s a virtual certainty the government will be  pro-euro, keeping the likelihood of a disorderly breakup low.
  • Eurozone nations are slowly backing away from their planned financial transactions tax.
  • And for now, the European Parliament has voted against restricting fund managers’ bonuses, easing some uncertainty for EU financials. 
  • Emerging Markets, on balance, are growing apace.
  • And India aside, Emerging Markets yield curves are positively sloped, supporting further growth.
  • Even China is doing fine—its growth rate has slowed, but it’s adding more dollars to global GDP since it’s growing off a larger base.
  • Chinese electricity generation—a key indicator of economic strength—jumped 8.8% y/y in July.
  • China’s M2 money supply accelerated, too, even as total social financing pulled back a bit—evidence officials will do what’s needed to avoid a credit crunch. 
  • Market-oriented reforms—a key driver of stock markets—continue in China.
  • And in Mexico.
  • Korea’s economy seems to have turned a corner.
  • And Korean exports are surging—confounding fears of the weak Japanese yen’s impact on local firms. 
  • Speaking of the weak yen, that dreaded “currency war” never happened—most nations realized weakening their own currencies wasn’t necessary to stay competitive globally.
  • Most everyone is panicking over the impact of QE tapering on Emerging Markets—not realizing the region hasn’t much “benefited” from QE. Another bullish false fear.
  • Japan still needs big economic reforms, but for now, its rebounding GDP is an important contributor to global growth.
  • Most people don’t notice any of the above.

And the half? Fund flows! Equity mutual funds have only recently seen consistent net inflows. Contrary to widespread belief, this doesn’t mean massive amounts of new money are about to drive stock prices way higher—but it does suggest sentiment is still at about the midpoint for bull markets. Long-skeptical retail investors are just starting to get a bit optimistic, but they aren’t uniformly so—and they certainly aren’t euphoric. Sentiment on its own doesn’t drive markets—hence why this is half a reason to be bullish. But still-dour sentiment provides room for the 62 points above to exceed investors’ expectations. This disconnect should propel stocks ever-higher.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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