Michael Spinks, Portfolio Manager at Investec Asset Management, discusses the record bull run in an interview with Lindsay Williams recorded on the 24th August 2018.
Lindsay Williams: In March 2009 the S&P 500 bottomed at the astonishing level of 666. As I speak now, it is above 2,870 and this week it achieved a milestone in US stock market history – the longest ever bull run; in other words, a market that was up over 20% from its low and didn’t correct to below 20% from whatever level it was. I think that’s the way to describe it.
To confirm or deny that is Michael Spinks, who is Co-Head, Multi-Asset Growth at Investec Asset Management in London. It has been an astonishing time since March 2009, Michael.
Michael Spinks: It has been exceptional, as you say. I think it is the equal longest alongside the 1990-2000 bull market, taking that March 2009 start date, and it has been an incredible run, over 300% rise, so in duration terms certainly equal. It is not quite as great as that 1990-2000 run in magnitude, which I think was a little over 400%. So maybe we have still got another 100% or so to go until we get to those lofty heights.
Lindsay Williams: Yes, indeed, but, given what is going on at the moment as we speak late on a Friday afternoon with the new Fed Chair, relatively new Fed Chair, speaking at Jackson Hole. He is obviously telling the world some soothing words. Maybe he has been chastised by Mr Trump. Let’s not speculate on that for now (maybe that is for later) but let’s go back to 2009, March 2009 – market on its knees, the S&P 500 at 666, as I said, that very enigmatic number, and it was almost pricing the world and the corporate world and the world’s economies for failure but, of course, from then on in up we went. Was it all to do with quantitative easing?
Michael Spinks: I think there is no doubt that very low levels of interest rates have encouraged risk-taking, have pushed people along the risk curve into credit where usually they would have owned government securities or cash and into equity and we have clearly seen companies take advantage of those very low levels of interest rates and free-flowing credit markets to buy back their own shares but it has also been a time of very strong earnings growth and companies have delivered up to now record margins at the average level and they have grown their revenues very strongly.
So I think it has genuinely also been driven by earnings growth. I think the S&P to the end of this quarter was up about 25% over the past year, the strongest year since 2010. So it hasn’t all been just monetarily driven. The companies themselves have also been delivering and that has sort of driven the rerating of a lot of these shares from those (as you say) levels that were previously on their knees.
Lindsay Williams: Has the S&P though become a fragmented animal? In other words, there are certain giants that are driving the S&P and there are a few of them doing okay and then there are a few laggards. Is it similar to, for example, the JSE Securities Exchange, which is dominated by 2, 3, 4 stocks? Is the same situation prevailing now in the S&P 500 and becoming more pronounced, more polarised?
Michael Spinks: Yeah, certainly you have seen that this year in particular, so the Facebook, Amazon, Apple, Netflix, Google stocks. There has been a much narrower market over the past year in particular. I think if you take those five companies out of the returns for the first half of this year, it would have been 0.6% up rather than 2.6% up that we had, so it’s certainly affected and has been a much narrower index. That has certainly been a feature of this market with increased concentration and I think those five companies are now about 12% of the S&P.
Lindsay Williams: Yes, indeed. I don’t know if that’s a good thing or a bad thing. The key question now is, Michael, where to from here? I have read lots of comments about the fact that a bull market doesn’t die of old age and it is certainly not looking as though it is going to die because of the lack of economic growth or the lack of corporate earnings growth.
Michael Spinks: No. I think the point about economic growth, when we compare that to the equity market, it has been a long run of economic growth because it has actually been quite weak in terms of its magnitude compared to other cycles. So it is a cycle that is certainly getting long in the tooth but I don’t think that is going to be something in terms of recession that is likely to upset things.
I mean that divergence in equity returns and economic growth has been one of the drivers behind the rise of populism and that political backdrop is something that is certainly an increased risk to markets. We are seeing increased use of sanctions, particularly by the States. I think that, rather than going for military wars, they are obviously taking on trade wars. So we understand that is a key risk to markets.
I think the changing liquidity environments – and you mentioned quantitative easing as being such a strong driver behind the market returns over the past 10 years – the changing liquidity environment, interest rates going up in the States – you are going to be getting 2.5% on dollar cash by the end of the year. So there are certainly factors at work that mean that it is a much more uncertain world than it has been for some time. Volatility on the S&P, of course, is still flat on the floor so hedges are still relatively cheap.
Lindsay Williams: Just quickly look at the economy, if we can, now because there are two different economies here. There is the Wall Street economy (which I like to characterise it as) and there is the real economy in the United States of America and you have got wage growth. I think the last figure from the Labour Department, wage growth I think across the board was 2.7% - no, 2.8% year-on year (excuse me) and inflation was running at 2.7%. So essentially we have got flat wage growth, real wage growth, and at the same time house prices aren’t doing so well. So it is not as if everybody in America is jumping through hoops and snapping sugar lumps off their nose because they are so happy.
Michael Spinks: It has certainly been a feature of this recovery and it is reflected in corporate margins that, on average, wages have been absent in the recovery. So unemployment around the 4% level, all-time record lows, but the quality of that employment is not as high as it has been in previous recoveries. So the broader participation and I think this again comes through to that rise of populism not just in the States but elsewhere is certainly a feature of this recovery, so I have seen a fairly sharp rise in terms of inequality.
Lindsay Williams: Yes, inequality is a worldwide phenomenon; in the United States of America very different though. Mr Trump is lauding the fact that his tax cuts have been one of the reasons that the S&P has done so well over the last year-and-a-half but, of course, it has done well for the last – well, since March 2009, as I said in my introduction. What about the future now? Apart from the long in the tooth aspect of the bull market, is there anything that sort of flashes red for you?
Michael Spinks: I think if you look at company earnings and profitability, it does remain pretty strong. I think in terms of what can continue to push the equity market further is the continuation of that and companies essentially getting over the risks of things like trade and potential tariffs and continuing to deliver the profits. Growth is certainly a positive.
I think the other potential upside risk to markets would be for the Fed to step away from their rate increases. We have got an assumption in the market of two further rate rises this year and one next year and, as they undo the impacts of quantitative easing and start to change the amount of liquidity in the system through that method, you could well see that provide another impetus to the market.
On the downside (as you say), we have got tax effects and they have undoubtedly boosted profits and have helped consumption over the past year and I think we have got the trade wars that the market has largely ignored. Absent a few currency moves, the trade wars have largely been ignored and the political environment and the liquidity environment is obviously something that could well impact markets.
So it is not a world without risk. Equally, I think that there is a fairly bearish consensus and not a great deal of conviction in higher markets and that has been the case for quite some time but largely sort of valuation-based and so the consensus could well be surprised by further raises.
Lindsay Williams: It is extraordinary, isn’t it, because this has been characterised as the market or rather the bull market that is the least loved in history and yet it is the longest in history. Can it go on do you think? You presented a fairly good case but, on the other hand, people and people that I have spoken to at Investec Asset Management in London have said that maybe a recession in 2019/2020 and then things could grind to a halt but it seems to me that that is a year, a year-and-a-half away.
Michael Spinks: Yeah, exactly. We do see risks further out on that horizon and I think we have also upped the downside case to some of our forecasts, partly because we do see risks of fiscal impetus in the US coming out of the growth profile and also the way that clearly some emerging markets have been impacted by trade and by slower growth outside of the US but it is difficult to see an imminent recession on the horizon, given that interest rates, although going up, are still relatively low and growth seems to still have, in general, a fairly positive impetus behind it.
Lindsay Williams: Michael, thank you very much for your time. That is Michael Spinks. Michael is the Co-Head of Multi-Asset Growth at Investec Asset Management in London.
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