John Manley

‘82 redo?

AdvantageVoice® Blog—4-15-13
John Manley, CFA, Chief Equity Strategist

“I can fly like I could before. I can fly with happy thoughts once more.”—Peter Pan
“My center is yielding, my right is retreating. Situation excellent. I am attacking.”Ferdinand Foch, Battle of the Marne

Maybe we should call it a Peter Pan market. It certainly is exhilarating, and it doesn’t seem to grow old. It is 15 weeks into 2013 and already the S&P Composite is within 1% of the target we set for year-end. And we thought we were bullish!

It is not like everything is wonderful. Consensus earnings expectations for both this year and next year have not changed since the end of 2012. Asian markets are being rattled by bizarre nuclear threats from North Korea. The strength of China’s growth is being drawn into question by falling copper prices. Europe has seen a forced bailout of Cypriot banks and the confiscation of some of the assets of their wealthier clients. Italy is paralyzed by a political situation that seems to be straight out of a Roberto Benigni farce. Latin America seems to be flirting with populism as it seeks its future economic course. The death of Hugo Chavez has left a political vacuum in Venezuela, while the political fate of Brazil still seems far from certain. The dollar is up, gold is down, and the chairman of the U.S. Federal Reserve (Fed) says the American economy should remain on life support for the time being.

Isn’t it wonderful?

I think that it is the proverbial wall of worry on which stock markets rise. Put another way, if the news of the past three months cannot stay the avalanche of money roaring into equities, what can?

There is a temptation to compare this with the heady days of 1982, when the last great bull market was launched. There are many similarities. The Fed is force-feeding money to the economy. The headlines are ghastly, but investors seem to already know them or simply do not care. The market leaders are classic early-cycle names such as utilities, health care, and staples. Stock market indexes and averages are breaking through price levels that twice had proved to be major tops. In the rear-view mirror, we can see the wreckage of two massive bear markets (induced by the economic maladies of inflation or deflation) and the frustration of an eighth of a century of no net appreciation of equity prices.

It shouldn’t be happening, but it is. It should stop, but it doesn’t.

For over a year, I have thought today’s markets were tracking markets of the latter stages of the great inflation bear market (1979–82). I have seen the modern equivalent of yesterday’s bond market vigilantes in the stock market vigilantes of today. If the parallels continue, we should be near or at the 1982 liftoff zone.

Unfortunately, it is not that simple. I lived through 1982 and, while the emotions and actions of today’s investors may be similar, the numbers are nowhere near as good. Risk-free yields were high then; they are low today. Corporate profitability was depressed then; it is rich today. Valuations were modest then; they are only mediocre (or slightly below mediocre) today. Then there were three coiled springs waiting to propel us into an 18-year bull market. I sense no such pent-up forces in place today.

All this may matter over the next 10 to 20 years, but I am not sure it is going to make a difference in the next two or three. The Fed should be with us until the economy is well on the way to recovery. Equity investors’ skepticism and dread may be close to 1982 levels despite somewhat-higher valuations produced by today’s lower interest rates. Stocks still yield more than U.S. Treasury notes, and earnings refuse to collapse on cue. That could keep us going for the next several years. I will leave the 10- to 20-year projections to the smart guys.

The views expressed are as of 4-15-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.


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