Welcome to the Chart of the Week.
The Chart of the Week highlights the average bear and bull market in the US since 1950. Some investors having been asking about where markets go from here, given the strong run by a handful of companies in the US, which have predominantly been behind the moves over the last year or so. So, given all the hype about AI is the US market in a bubble?
We think we are in a bull market but not a bubble and here’s why.
Here are three things to watch out for:
1. A hot IPO (new companies coming to the market to list) market.
When new companies list they never average more than a 25 percent first day move, the IPOs of 1999 saw a mean day one gain of 71 percent. Moreover, there was an average of 2 IPO/day that year (476 in total), a record back to at least 1980. Despite last year’s gains there were just 54 IPOs in 2023, and they averaged a first day gain of just 12 percent.
2. Landmark M&A (companies merging or buying other companies) Deals.
Anyone around in 2000 will remember AOL’s purchase of Time Warner for $165 billion. This was easily the worst high-profile M&A deal of all time, made possible by AOL’s inflated valuation during the peak of the dot com bubble. Exceptionally bad deals happen at the top, even if at the time they seem quite sensible. M&A activity is ultimately a function of CEO/board confidence. Just like retail investors chasing hot IPOs at a market peak, senior managers fall prey to the same overconfidence that the good times will last forever. M&A activity is only picking up now after a slow 2023, a good sign that equity markets are not yet in bubble territory.
3. A double is a bubble.
Whenever the S&P doubles in 3 years or less, stock prices decline shortly thereafter. The same is true about the NASDAQ Composite over any rolling 1-year window back to the early 1970s. A double is sign of speculative excess because macro conditions are never so different that asset prices should rise 100 percent over a short period of time. When prices double, you know speculation – not fundamentals (company profits) – are driving those gains.
In every past bubble back to the 1980s, IPO markets have been hot, M&A activity has yielded large, landmark deals, and stocks have typically risen by 100 percent in a short period of time. None of this is true right now.
There is a lot of focus on the equity markets. However, we are quite excited about the prospect for bonds as we get closer to interest rate cuts in the US and Europe.
One of the key benefits of investing in a multi-asset portfolio is the diversification it brings, by investing in different asset classes and taking advantage of different opportunities as they arise. Today, we still see lots of things to be optimistic about in markets, despite the constant barrage of negative media headlines.
Takeaway: It’s important to remember that dramatic selloffs tend to happen infrequently, but do leave lasting doubts, which impact long-term progress.
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Marlborough Podcast: This week, we discuss tech and growth confidence, earnings strength & the UK budget . Click here.