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Are investors finally falling in love with what is often called the most hated bull market run in history? Global equities have been climbing for much of the year. And there are now mounting signs that investors are beginning to shed some of the inhibitions that have lingered since the financial crisis.
Looking under the hood of the recent rally and several positive trends become apparent. Small cap stocks have recovered their vim. And growth sensitive, high beta shares have recently outperformed more stolid, defensive ones.
This optimism is particularly apparent in the US, with cyclical industry, like financials, energy, materials, and industrials have all outperformed some of the more defensive sectors, such as utilities, real estate, and consumer staples over the past month. But it is the international backdrop that is slowly eroding the pervasive scepticism that has characterised the post-crisis rally.
Bank of America notes that the variability of economic growth across 45 major countries is running at the lowest in at least half a century. In other words, the global economy is swimming forward in a leisurely, but pleasingly, synchronised fashion. And that is reflected in robust global corporate profit growth this year and expectations for a positive earnings season, which starts in the US this week. Analysts' expectations for US profits have been muted by the recent hurricanes. But that just lowers the hurdle for companies to surmount.
Of course, the seeds of a correction are probably now being sown. The synchronised global economic expansion and budding optimism ratchets up the likelihood of tighter monetary policy. And low interest rates remain one of the most important foundations stones that the stock market rally rests on. And there are no shortage of other known and unknowable risks out there.
For now, investors appear to be grudgingly learning to stop worrying and love the rally. But as John Templeton observed, "Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria." We may at last be approaching that final stage.
