Low Growth, Tame Sentiment and Relative Value

Published On: January 9, 2020

Written by: Ben Atwater and Matt Malick

With 2019 ended and 2020 beginning, we are writing a series about markets and the economy.  The series is mainly visual, anchored with charts, but includes brief bullet point explanations of each chart.

Throughout the series, we explore the present bull market which commenced on March 9, 2009. Our essays to date have addressed the strong labor market and solid consumer confidence, benign inflation and low interest rates, unprecedented late cycle government stimulus and what’s been interesting, even unique, about this bull market. 

Today we continue with what’s been interesting about this bull market before we ultimately analyze what threatens the bull market in 2020 and beyond.  To read the previous essays in the series please visit our blog.

• Although the present bull market has offered above-average returns and duration, it has done so with below-trend gross domestic product (GDP) growth. 
• GDP is the most common indicator to track the overall health of the U.S. economy.  It represents the total dollar value of all goods and services produced over a specific time period and reflects the size of the economy.  The rate of GDP growth, therefore, is the rate of growth of the economy. 
• Throughout the present bull market, U.S. GDP has grown at a below-average rate of about 2% versus the long-term historical average of about 3%. 

• Overconfidence can be an Achilles’ Heel for bull markets because if investors are too positive it means that stocks are overbought and vulnerable to a correction or worse.
• U.S. Investor Sentiment, Percentage Bullish, is an indicator that is a part of the American Association of Individual Investors (AAII) Weekly Sentiment Survey. It indicates the percentage of investors surveyed that had a bullish outlook on the market. The most extended point of this bullish survey was in 2000 during the technology boom. This sentiment indicator reached 75% during that time frame. 
• The below-average bullish sentiment throughout this bull market has meant that investors haven’t become overconfident like they were in 2000.  Sentiment is not a foolproof indicator as sentiment also wasn’t extended ahead of the Financial Crisis.  However, all things being equal, it is healthier for a bull market when it climbs a wall of worry and skepticism prevails.

• Despite below-average economic growth and little excitement about the stock market, stocks have performed well largely for one reason – relative value. 
• The earnings yield on stocks (earnings divided by price) has far outstripped the yield on the risk-free ten-year U.S. Treasury bond since 2010. 
• Primarily as a result of sustained low interest rates, stocks have offered a better relative proposition than cash or bonds. 

It’s certainly been a bull market with lots of fascinating anomalies.  Over the next couple of weeks, our final two notes will examine what might ultimately derail this bull market. We hope your 2020 is off to a great start.  Please don’t hesitate to reach out to us as you contemplate your 2020 financial goals.