A new bull market?

After a period of choppy trading, investors are returning to the fray. The recovery in stock markets has been impressive, but is there more to come?

The arrival of September proper (albeit with an extra day of malaise thanks to Labor Day) suggests that we will see the return of volatility to global markets, after a relatively quiet period for stocks, especially in the US. Volumes will rise and the calendar will begin to fill up once again.

Of particular note has been a slight slowing in one of the year’s key trends, namely the outflow from equity funds (both active and ETFs). Outflows over the past twelve months amounted to some $115 billion, and while this is high, it is down from the $160 billion that was seen earlier in the year. Perhaps finally investors are returning to equities. New all-time highs on the S&P 500 will do that to you, I suppose.

September doesn’t start out as one of the most promising months. Since 1950, the average decline for the Dow Jones in the month has been 1.1%, while the S&P 500 has fallen 0.7%. Even the Nasdaq has, on average, dropped by 1%. Coming at it from the other way, the average for the VIX in September over the past 25 years, has been 22, the highest of any month. Investors should therefore be on notice for increased movement in stock markets – the choppy rangebound days of August are now behind us.

One chart to be aware of, from Charles Schwab:

The chart shows the rolling five-year return in global markets (blue line). This has turned consistently higher since the turn of the year. As of January, the five-year return was 8%, or below 2% annualised. As a result investors continued to abandon equities, and arguably with good reason (even if the yield argument still holds here).

Now the five-year return has rebounded, moving into double-digit territory, helped along by the fact that the big falls in 2011 around the US debt ceiling problem (remember that?) have now dropped out of the calculation. If markets can hold their current gains to the end of the year, the five-year rolling return will move toward 40%.

If investors finally start buying again, this will provide the badly-needed second wind for equity markets. In the last two periods when investor buying turned around (March 2009 and May 2012), global stock markets saw double-digit returns in the next 6-18 months (again, chart from Charles Schwab):

The final piece of the puzzle will be sector rotation. If a new bull market is to dawn in earnest, we need to see the ‘risk-on’ sectors lead the way. This means technology, financial stocks, consumer spending and mining, while the ‘safe’ sectors like utilities and consumer staples lag behind. To some extent, this is what we’ve seen this year, as the chart below shows. 

The picture is spoiled somewhat by oil, which has failed to make gains so far this quarter, but generally thus far the overall landscape points towards a sector rotation, which is just what we need for this rally to push on not just to the end of the year but into 2017. 

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.