Why this bull market may have further to run
David Tepper, the billionaire hedge fund manager and founder and president of Appaloosa Management, doesn’t share the bearish views of his hedge fund peers such as Gundlach, Dalio and Howard Marks. In fact, he is quite certain that this market has further to run.
Speaking recently to CNBC’s Scott Wapner, David Tepper noted, “Any comparisons to past overheated markets are ridiculous, look at where multiples and rates were in 1999. I’m not saying stocks are screaming cheap, but you’re nowhere near an overheated market.”
There is some merit to the idea that markets don’t reach levels that can be described as ridiculous until a majority of investors have thrown caution to the wind. That there are so many who remain cautious suggests a correction (and the more attractive values that come with it) might be some way off.
My own experience suggests that ultra low rates and accelerating economic growth tend to be associated with very strong bull runs in markets. As the interest rates first begin to rise, market sentiment tends to focus on the economic growth and its positive ‘inevitable’ impact on corporate earnings.
As an aside, and for Australia, we have been very concerned, as you know, about the plight of contractors working in the residential construction industry, as large double digit declines in residential development approvals and commencements eventually feed into weaker construction activity. Australian corporates however are planning to dramatically increase their capital expenditure plans. Following the bullish NAB business sentiment survey, the latest forecast for corporate capex is that in the 2017/18 financial year, $101.8 billion – 17.6% per cent more than anticipated last quarter, is expected to be invested. Treasury’s numbers seen by the Australian Financial Review indicates that non-mining investment is expected to rise 5.3 per cent for FY18, compared with a previous forecast of a 2.3 per cent fall. To some extent this could offset the negative impact on economic growth from a slowing in residential construction activity. Consumer sentiment remains in the doldrums but one cannot help but think this too might turn around if corporate investment leads to higher employment and/or rising wages.
Back to the global picture, it is not inconceivable to see strengthening economic growth and low interest rates (albeit beginning to rise) associated with a strong bull run in equities that causes all the bears to capitulates, producing what some call a ‘blow off top’.
In past experiences equities rally strongly as rates begin to rise because sentiment is focused on the forthcoming growth. Only after several interest rate rises do investors begin to consider the negative gravitational impact on asset values from rising rates. This scenario might also coincide with the idea proffered by some commentators that the record credit market refinancing of almost US$500 billion of CCC-rated junk bond debt in 2019 will prove a stumbling block for markets.
Finally, I couldn’t be more delighted to hear earlier this year of Warren Buffett’s Berkshire Hathaway buying into Apple well after our Global team, and, more recently, David Tepper doing likewise with Alibaba – China’s version of eBay and Amazon. We have owned Alibaba in the Montgomery Global Fund and Montaka Global Fund for some time, and from lower prices than those paid by Tepper. The timing of our purchases speaks volumes about the expertise of our Global team.
If you would like to diversify your portfolio – with high quality global businesses like Alibaba and Apple – we suggest you look into our soon to be listed exchange traded managed fund. It will mirror the very successful Montgomery Global Fund and target a minimum distribution yield of 4.5 per cent per annum paid semi-annually. You can Pre-Register here.
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.
Andrew
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Haha Tepper sounds like Buffet telling everyone they should pile into index funds etc and in the meantime he goes to 100 billion cash, his highest level ever i think? I guess when you have to dump a few billion in stocks you need to do some marketing.
simon
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I think Ill take Teppers views over (the views highlighted in the blog post by) Gundlach, Dalio and Howard Marks any day of the week sorry RM, but its chalk and cheese.
Roger Montgomery
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Simon, The point of the blog post was indeed to highlight the divergent views of the high profile hedge fund titans in the US.
C
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Given that interest rates have never before been this low, isn’t it possible that this will be the longest bull market in history and valuation metrics such as PE ratios can’t be directly compared with the past until interest rates return to something near normal which could be a long time away.
Roger Montgomery
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Comparing P/Es to interest rates is very common (Buffett just did it again on CNBC) , but doing the comparison is playing a relative game.
Chris
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It’s interesting that when stocks are, or appear to be expensive, there are so many differences of opinion as to whether they are, yet, when there has been a correction and things look cheap, there is no question that ‘they are cheap’; no one doubts it and it is obvious.
So why is the flip side, ‘expensive’ so questionable and hard to define ?
Let’s make it easy and just discuss a broad based index.
People will say “Yeah, but they’re cheap for a reason” or “cheap rubbish is still rubbish”. During 2012, you couldn’t GIVE Greek shares away because the economy was so bad, or more recently, Russia; yet you will hear people say “US stocks have always been expensive, it’s because they’re quality, the USA is the largest economy, you buy American because you know it’s good, everyone looks to the USA to lead the way” etc.
It seems like ‘expensive’ needs more justification that it isn’t so, yet ‘cheap’ is obvious to see. I keep remembering the justification to buy something of quality, that “value is remembered long after price is forgotten”, yet, this goes against what we want, because ideally, you want to remember (and celebrate) the ridiculously low prices you paid for something of great value 10 or 20 years ago, that continued to grow in value.
Laurent
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Wow, Montgomery etf – coooool. There are loads of people calling the top. Reminds me of 1998. Still think there has to be a 5-10% sell off but who knows when.
I guess we’ll see but I’m thinking more and more the global economy will continue to grow and recover and bond yields and central bank rates will go higher. I like Gundlach’s saying on the fed: “They generally keep raising rates till they break something”. Could happen on a global scale.
Guy Davis
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David Tepper is a legend, but he is way off with that comment. Forward pe and cape are not at nosebleed highs( although cape is still 2nd or 3rd highest in history), due to record high profit margins making E look artificially high (unless you believe they will stay this high forever). But revenue based measures that cut out the pm like s and p 500 P/R and profit margin adjusted cape are as high as 2000 and the median sp500 stock price/revenue is at an all time record by around 50%. Doesn’t mean a crash is imminent but on valuation grounds, those are the facts.