U. S. bull getting long in the tooth: strategist

Stock markets in the U. S. have been so robust for so long that investors, understandably, are getting antsy.

The bull market reached the six- year mark earlier this month. Over that period, the S& P 500 index has more than tripled. Combined with the strengthening U. S. dollar, it’s been a bonanza for Canadians with stocks and exchange- traded funds ( ETFs) priced in greenbacks.

With each new market peak, however, the question looms a little larger: How much longer can these good times roll?

It may be down to a matter of months, according to U. S. investment strategist Jim Furey of California- based Furey Research Partners.

Furey, who was in Montreal last week to share his insights with investors of Canadian small- cap specialist Pembroke Private Wealth Management, has price targets of 2,400 for the S& P 500 index and 1,388 for the Russell 2000 ( small- cap) index. Late last week, they stood at 2,056 and 1,231, respectively, roughly 12 to 17 per cent short of the goal.

“It may be that broader averages start to stall when they’re achieved, which may well occur this year. That’s where I think we’re going, but right now there’s still some upside,” Furey said. “A lot of these major bull markets tend to last seven years and then struggle.”

Even if momentum stalls, Furey prefers the prospects of stocks over bonds, with U. S. small- cap stocks more attractive than large- cap at this time because the domestic economy is bubbling and most of their revenue is there. The rise in the U. S. dollar ( up 20 per cent in 10 months) is having negative implications for U. S.- based multinationals that derive significant revenue in foreign currencies, he said.

Curiously, bonds continue to attract steady fund inflows, despite historically low interest rates, he said. Risk- averse pension funds continue snapping them up to fulfil their liability obligations, unwilling to expose themselves further to stock- market volatility.

“Investors generally do not have confidence equities can consistently return money. For them, return of capital is every bit as important as return on capital. There also seems to be a strong consensus that central bankers are in control of interest rates,” he said. “To my mind, though, there is arguably more risk in bonds than in stocks for anyone with a five- to 10- year time frame.”

Furey doubts that interest rates are going up any time soon.

“I don’t think the Fed will raise rates this year. Were they to do it, we’d get another large move up of the dollar. If the goal was to raise rates in order to lower them in the future, they may not be able to raise them enough to make a difference.”

Those expecting a rapid rebound in oil prices may also be disappointed. While the history of previous oil- price corrections shows that most losses are erased within one or two years, that’s less likely now because of slow demand growth and more durable supply response. “It may be a more drawn- out recovery in oil prices than a V off the bottom like we’ve seen in the past.”

While the stock- market run- up of the past six years has amply rewarded many investors, it wouldn’t be realistic to expect gains on that scale much longer, given current growth and demographic outlooks globally, Furey said.

“We’re transitioning to a lowreturn era. After this normalization process, returns arguably will be lower. It’s unrealistic to expect 12 to 15 per cent returns for the next decade. Globally, you have demographics pointing to declining workforces in several countries. If you layer on the balance sheet problems a lot of people or countries have, the growth outlook can only be reduced.”

We’re transitioning to a low- return era ... It’s unrealistic to expect 12 to 15 per cent returns for the next decade.