In recent weeks, the European Central Bank and the Fed have announced new monetary stimulus and appear ready to act to prop up the global economy.
In response, some investors have apparently rediscovered their appetite for risk. Since November 29th lows, global stocks are up roughly 9% and emerging market equities have gained about 12%. And during the past eight weeks, high yield bonds have risen roughly 5%.
In fact, this week some market watchers have declared that weâre in the midst of a bull market. For example, the WSJâs MarketBeat blog, noting that bullish sentiment is on the rise, says âWelcome to the New Bull Market,â or at least welcome to a continuation of the bull market it says started in March 2009.
Itâs important, however, to put the current âbull marketâ in context. Thereâs a big difference between various types of bull markets. In secular bull markets (like the one we experienced from 1982 to 2000), stock prices rise over a long period of time thanks to ongoing improving fundamentals. Cyclical bull markets, on the other hand, can occur within both secular bull and secular bear markets, but tend to be shorter in duration.
In my opinion, we arenât in â and arenât entering â a new secular bull market. Instead, weâre still stuck in a long-term secular bear market that began in 2000. Itâs not as if the problems that haunted investors last November â a European crisis, a political divide in Washington, slow growth in developed markets and a potential banking crisis in China â have gone away.
Equity performance from 2003 to 2007, however, shows us that there can be relatively long rallies in secular bear markets. I believe the rally weâre experiencing now is actually a cyclical bull market that could easily go on for the remainder of 2012, assuming the European crisis doesnât take a turn for the worse and we donât experience other unforeseen market shocks.
Distinguishing between secular and cyclical bull and bear markets is so important because of their different investment implications. In secular bull markets, investors can rely on a traditional buy-and-hold strategy. In secular bear markets and accompanying cyclical bull markets, however, having a more tactical approach (i.e. a timeframe of five years or less) can help investors take advantage of market peaks and valleys and potentially avoid having investments merely move sideways.
So whatâs a tactical investing idea for the current cyclical bull market? Well, letâs look at the investment implications of the Fedâs announcement this week. First, it suggests that nominal rates and real rates will stay low for a long time. This further buttresses the case for gold. Second, if US interest rates are going to be anchored at zero for an extended period, people are going to need to take some risk â in one form or another â to generate a decent return.
Source: Bloomberg
Past performance does not guarantee future results.
Gold and other precious metal prices may be highly volatile. The production and sale of precious metals by governments, central banks or other larger holders can be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the supply and prices of precious metals.
