These bulls have stamina. Global stock markets hit rock bottom 23 months ago. Since then, the US bull run has lasted 700 days – making it the 12th longest of the 26 bull markets since the Great Crash of 1929, according to Bespoke Investment. The total return on the S&P 500 has now beaten that on 10-year Treasury bonds by 103 per cent since the March 2009 nadir. The latest upward leg is also long-lived. Ever since September 1, the S&P has traded above its 50-day moving average, a measure of short-term trend, its longest stay above this average since the bull market began. Despite such signs of froth, stocks have ignored geopolitical reasons for caution such as November’s Irish bail-out and the unrest in Egypt.
Emerging markets spoil the pattern. For a decade they have functioned as a “high beta” play on developed stocks, outperforming when the west does well and underperforming when it does badly. But this year they have underperformed by 10 per cent. This might be benign. Western economic and corporate data have provided positive surprises since September, while western central banks stay determinedly dovish. While money stays easy there is nothing to do but sell bonds for stocks. And emerging markets – where central banks are tightening – now trade at a premium to the developed world in book multiple terms, and only a slight discount in price/earnings terms. With the historic misvaluation that started their bull market now corrected, maybe this shows that sensible value-based allocations have replaced crude correlations.
It is wiser, though, to view emerging markets’ problems as malign. Worries about emerging market growth mean worries about the growth picture for western companies. They are selling off because they have higher inflation. Their tighter monetary policy will limit demand for western goods, while inflated raw materials costs will soon be exported to the west. That is reason for stocks’ outperformance of bonds to persist – but also for the bull run in developed market stocks to end