Get ready for a stock market boom!
I have just completed my latest monthly column for Money magazine, and it got me thinking about why I think there might just be an almighty stock market boom sometime between now and 2016.
You have already heard me discuss Janet Yellen having her accelerator-foot quite firmly to the floor, and how her study of the great crash in the 1930s has made her the most dovish of doves. In other words, her concerns about raising rates too early and plunging the US back into a recession will ensure interest rates stay low for much longer than young economists – those fresh out of university – will have you believe.
Those low rates in the US should spur a continuing migration out of cash and into stocks and property, where the expected yields (but not necessarily returns) are higher.
Here in Australia, the scenario is similar:
1) The risk-free rate is now negative, ensuring a destruction of wealth the longer an investor remains in cash.
2) This corrupts standard measures of risk and makes shares and property look less risky than they really are.
3) In turn, this will spur a migration to riskier assets such as stocks and property (you are already seeing it – property prices are rising faster than incomes, and incomes are rising faster than inflation, but in the very long run property prices rise little more than inflation).
4) The migration from cash to shares will be made more pronounced by the generational avalanche who are on the cusp of retirement and desperate to secure an income better than the $39,000 per year considered to be the poverty line for a couple with two children.
5) The migration to shares will also be made more pronounced by the fact that there is a disproportionately large amount of money in cash thanks to the global financial crisis. This cash is yet to be mobilised fully. When it is, expect to see a good and proper boom, followed by a bubble, followed by – well, you know what happens after that…
Of course, there is always the chance we could be wrong. But somehow, I don’t see that happening.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Sue POLSON
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More imortant to be ready with safe cash after the bust so you can pick up the A1 companies at a discount. Those (like me recently) who worry about missing out may not have the cash when it’s needed most.
Adrian
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I’m not judging CPI one way or other, but thought it is still the widely accepted measure of inflation.
For my understanding I would be interested to learn how you calculate the “risk free rate” which you mention is negative, but I couldn’t hear in the video or in this post how you are defining this. I had assumed you would be using RBA cash rate minus latest CPI inflation rate?
Roger Montgomery
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You need to judge CPI one way or another, and “widely accepted” doesn’t equate to ‘correct’ nor ‘realistic’! For example consider the lower bound problem which says that quality improvements do not imply that prices faced by consumers have dropped, especially if lower quality goods are no longer available.
Adrian
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Hi Roger, one further question springs to mind… Treasury indexed bonds still yield 1+% premium over CPI for the long term, so does it also depend on your reference point when you assess the real risk free rate? No doubt we are having very low rates by historical standard, but retirees and risk averse investors can still lock in a positive risk free rate, unless I have it wrong? Thanks again
Roger Montgomery
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If you believe CPI!
doug-folber
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A very astute market advisor
george-madarasz-5
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I see the point, Roger, but what seems different about this possible boom is that there is more awareness of the underlying realities. It is as though people are knowingly playing Russian Roulette simply because they have no other way to make money. The punters are in a state of constant hyper – vigilance
, wondering with every dip whether THIS is the first sign of the bubble bursting. If the boom transpires as you say, it will be the most paranoid boom in history.
Roger Montgomery
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Indeed. As I mentioned in the video, investor’s assessment of risk is being corrupted by low interest rates.
Simon Stewart
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Hi Roger,
Sounds like we should hang in there a little longer if your scenario plays out. Just wondering though what the poverty line is for a couple retiring with no dependant children and a mortgage paid off? Perhaps they will just need to start selling of the investment property portfolio and we will see a bigger crash in the housing market.
Cheers
Adrian
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Hi, I read elsewhere here that the fund is roughly a third in cash. If you see this boom as a likely possibility, will you consider being more highly invested now, and wait until the bubble is further progressed to move into cash? Interested to hear your thinking on this.
Thanks, Adrian
Roger Montgomery
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I don’t think we are clever enough to be able to make such precise timing decisions. So we will continue to follow the process remembering that as I mentioned in the video, investor’s assessment of risk is being corrupted by low interest rates.
jeffrey poon
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who was it that said, “More money has been lost reaching for yield, than at the point of a gun”.
Google told me it was Raymond DeVoe.
I do agree the market can continue moving up, supported by central banks. But I wouldn’t want to be around when the music stops, and there’s limited chairs left.
Roger Montgomery
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Indeed Jeffrey. As I mentioned in the video and in my answer to the other similar comments here, investor’s assessment of risk is being corrupted by low interest rates.
hedley.calvert
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….. which begs the question, how will this view affect the approach taken by the Montgomery fund. Do you stay heavily weighted in cash on the basis that stocks are overvalued and there is little value in the market. In so doing you under perform the market. Or do you tweek your valuation assumptions and margins for error so as not to be left behind from the pack? Its a tricky dilemma with a lot at stake and love to hear your thoughts.
Roger Montgomery
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Hedley, As I mentioned above, I don’t think we are clever enough to be able to make such precise timing decisions. So we will continue to follow the process remembering that as I mentioned in the video, investor’s assessment of risk is being corrupted by low interest rates.
Michael Shapiro
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In my view there are warning signs that point to some harsh correction ahead. First of all QE is about to come to an end in October. We all know what happened the last two times QE ended. Many seasoned traders point to roughly seven year business cycles where bear markets occur – 2000, 2007, 2014?
In the end you are right Roger, Janet Yellen is the most dovish of the doves, and I am pretty sure she will re-start a new round of QE. If she doesn’t then Draghi will. Consequently, asset prices will re-inflate, but in the short term it could get really bumpy quite soon.
Roger Montgomery
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Indeed, nothing moves in a straight line, except perhaps a snow ball rolling down a hill. And don’t forget low rates have corrupted investor’s assessment of risk. That always ends badly.
Paul Audcent
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I am a great believer in the traditional Investment Cycle Clock. However nothing seems to agree with the clock at present, so your inspired comments are always are appreciated as are your teams video’s video’s.
Roger Montgomery
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Thanks for the encouraging words Paul.