The Bull Market Will Climb the Wall of Worries

Yeeha! Stocks are on the move. Yesterday, the S&P 500 hit its highest point since May 2015. Commonwealth Bank’s record half-yearly profit announcement will grab most of the attention. But it’s actually furniture retailer Nick Scali that grabbed mine.

The company’s chief executive says the wealth effect from rising house prices has underpinned a third consecutive year of strong double-digit sales growth. Profit for the half-year was up 45%. Think $5,000 sofas. Such discretionary spending doesn’t spell looming recession to me.

We hear a lot about how unaffordable housing is in Australia. That’s certainly a debate we can have. But never forget the investing implications. Existing homeowners feel and act richer when house prices are on the up. This will show up in the reported earnings of relevant stocks, all things being equal.

You’ve heard about Melbourne and Sydney’s booming real estate market over the last few years. But what about Tasmania? Apparently the hot real estate market down there is enough to keep the state government budget in surplus for the next four years.

You might also be surprised to know that Hobart outperformed every other capital city in the three months to 31 January. That’s a credit to buyer’s advocate Catherine Cashmore. Catherine suggested Hobart as a place to scout for buys back in 2015.

If there’s more growth to come in housing, and I think there is, then there’s more growth that can come in the stock market. The naysayers will say stocks are overstretched, and that the current rally will peter out. But they’ve been saying that for a long time now.

I happened to be at an investment meeting on Tuesday night. One of the gents there told us that he had been out of the market, and had moved to cash, during the GFC, all thanks to Phil Anderson. Phil is my co-editor at our forecasting advisory service, Cycles, Trends and Forecasts. Here’s why I bring it up.

The gent then explained that he knew Phil’s cycle analysis said Australian stocks were at a generational low after the bust. They were prime buying opportunities.

But, intellectually, knowing something is not the same as being able to act on it. Such was the fear and doom around the world at the time, this gent stayed out of the market for a long part of the recovery.

There’s no shame in that. The point is that investing your money involves your emotions and survival instincts. It can feel ‘wrong’ to risk your money at certain times. Fear can hold you back.

I say that because I sense a lot of people are still reluctant to commit to the stock market. There’s not quite the sense of doom that there was eight years ago. But there’s a pervasive feeling that stocks don’t have much underpinning them.

You can take that as a handy indicator. When people are afraid, they keep their money out the market. Historically, markets collapse when investors pile all their money in and then leverage up on top of that.

You might care to note that stocks in the US are trading at all-time highs. This looks very bullish for both the US and the world. Don’t be deceived by the idea that the run in US stocks since 2009 is getting long in the tooth.

An analyst in the US called Steve Sjuggerud made a good point on this earlier in the week. He said that bull markets don’t die of old age. This run from 2009 to now is the second-longest run in US stock market history.

There’s no timeline ordained from market heaven that says it can’t go on to become the biggest. Just because it’s run for eight years doesn’t mean it can’t go on for nine.

Steve made a further point: Bull markets typically make a peak in the midst of unbridled optimism. That goes back to the psychology of markets we spoke of earlier. Neither here in Australia nor in the US are investors gripped with dizzy visions of the future.

What do we hear mostly? Worries. There are concerns about the Federal Reserve, interest rates, Trump, China and all the rest of it. So goes the old saying: Bull markets climb a wall of worry. This bull market will keep climbing these if you ask me.

Scepticism is a healthy thing in the market. It’s good to see. But you should acknowledge it, and then turn it to your advantage. Do you really want to be buying when everyone else ISN’T worried? The crowd is always wrong at the turn. It has to be that way. That’s the market.

There’s lots of solid evidence to suggest Australian stocks can strengthen from here. If you’d like to see exactly why that is, I suggest you go here to find out.

Callum Newman

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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