David Fuller's view

Perceptions will vary among investors but in terms of the overall crowd consensus, extreme optimism is a well-known contrary indicator.  It occurs when investors are fully long, making money and talking their book, and no one is more bullish than a converted bear.  Their heroes will be those who are long and leveraged, and making the most money while the market is still rising.  Value investors will be temporarily viewed as contrary indicators because they turn bearish too early during manias.  

Conversely, extreme pessimism is evident following a crash, and there is no one who is more bearish than a recently converted bull.  The last thing they want is the double humiliation of hanging on grimly before finally throwing in the towel and selling, only to see the market rally sharply.  Their heroes will be the super-bears forecasting Armageddon.  Value investors will be temporarily viewed as contrary indicators because they turned bullish too early during the panic.

Where are we today in terms of overall market sentiment?

Stock market indices are not at extreme technical levels although valuations are generally somewhat high.  However, Wall Street has performed better than most, and some of the tech shares and leading Autonomies have bubbly valuations, as I have mentioned recently, although nowhere near on the scale of 1999/2000.  Moreover, they tend to correct these overextensions on an individual basis, which is a healthy process of reaction and consolidation. 

Long-term forecasts are highly speculative, since no one can know the future - not least due to all the variables.  Nevertheless, there can be approximately similar cycles.  For instance, following the post-WWII secular bull market which carried on into the middle 1960s, bubble conditions produced two bear markets on Wall Street, during a lengthy valuation contraction period of convalescence. 

The next secular bull market commenced in 1982 and carried on to the end of the Century before bubbles burst, notably for ‘new economy’ tech, which had visions but not profits.  The 2008 crash was largely due to the leveraged ‘liar loans’ housing bubble.  Accelerating technological innovation is very exciting for the long-term future but is also unprecedentedly disruptive, as we have been seeing. 

My hunch, which veteran subscribers have heard before, is that we will probably see evidence of the next secular bull market before the end of this decade. There is even a possibility that it has already started in the US stock market.  However, I am uncomfortable with this view, having previously said that the normalisation of interest rates would be somewhat disruptive, possibly causing a medium-term cyclical bear trend.  Additionally, most other stock markets are way behind the US, as you can see from this MSCI World ex-US Index since 1988.  Even if we look at the MSCI World Index, in which the USA has by far the biggest capitalisation weighting, it has yet to maintain a break above its 2007 high.  The MSCI Emerging Markets Index has lagged further behind. 

In conclusion, this is not a bad environment overall, but some caution is warranted.  It remains a buy-low-sell-high environment. 

This review will continue next week, featuring some individual stock markets which are likely to remain leaders, and even more importantly, leading sectors.