New Market Cycle?

Has the five and a half year secular bull market in equities finally come to an end? Well, it is beginning to look more like that as time progresses. The buying on the dip strategy, that worked so well over the last five and a half years and was a win win strategy, might not play out like that in the future. If this secular bull market has expired, bearing in mind that the typical time frame of a bull market is about five years, so the bull market has run for six months longer than usual, then maybe the market might well be posed for a new trend. But it might be too simplistic to determine the end of a market cycle solely on the duration of that cycle.

Indeed, there are many factors at play which drives a market cycle. This bull market, which the more bearish amongst us believe has run its course, has been induced by the central banks. The fundamentals, at least over the last few years, have not really played a role in determining the market's trajectory and investors have brushed aside the fundamentals of investing. The price earning ratios of stocks, market capitalisation and even the underlying state of the economy seems irrelevant today and over the past few years. The central banks, have managed to surgically remove the fundamentals from the market and all investors look to now is what the Gods, the central banks, will do next.

When the market looks like it is about to go cold turkey, the central banks keep investors high by pumping the system with liquidity, known as quantitative easing (QE), which involves massive bond purchases. Consequently, the market has become hooked on QE. But you can't keep a drug addict high without the drugs. So who knows, maybe the central banks will be back again with their fix of QE, perhaps they'll even give it another fancy name, call it operation twist or tango just to keep mainstream bamboozled.

So while the market is kept high on funny money the real economy is starting to deteriorate at an accelerated rate. Even the bright spots are not as lustrous as they were recently. Market Watch reported, October 21, further evidence of a slowdown in the Chinese economy. Firstly, housing sales have declined sharply. “Housing sales in China in the first three quarters this year fell 10.8% to 4.05 trillion yuan ($661 billion), according to data released by the National Bureau of Statistics on Tuesday. Sales were 3.43 trillion yuan in the first eight months of the year--down 10.9% from the same period of 2013.” “China's economy in the third quarter grew at its slowest pace in five years as it battles a slumping real-estate market and weak domestic demand and industrial production.

The results Tuesday marked a drop from the second quarter's growth rate and suggest China's economic performance for all of 2014 will come in at the low end of the government's target of about 7.5%.”

With respect to Europe, regretfully there is no good news to report, the economic situation is going from very bad to dire, on a weekly basis. Spain's industrial output per capita has gone back to 1976. Austerity has devastated the economy with more than half its youth without work, already one in four of the workforce are without a job and that is likely to rise, if they continue with the Brussels (German) imposed austerity cuts. Save the Children report calls on the Spanish government to take “emergency measures,” with almost a third of Spanish children now at risk of living in poverty. In Italy, Rome, up-to a million people are marching for job creation. Tax breaks and spending cuts unveiled in Italy’s 2015 budget last week have also come under scrutiny, with Secretary General Susanna Camusso arguing that the plans “will keep the country in a state of recession.”

The French are wrangling with Brussels (Germany) over breaching its EU deficit target of 3% of Gross Domestic Product (GDP) for the third time. France expects its deficit to reach 4.3% of output in 2015. A group of anti-austerity MPs, known as "les frondeurs" (rebels), say that Brussels's deficit target will "asphyxiate any possibility of growth".

Greece is now in full blown collapse and has been downgraded to emerging market status.

Under extreme stress you see the personality traits of individuals and nationals. The Southern Europeans through their hands in the air, the French bicker with the Germans, the Germans get bossy and the Brits nervously look over the English channel, making sure there are no aliens sailing across the sea. Isn't British Prime Minister David Cameron talking about placing quotas on EU migrants?

But back to the markets. In this recent sell off there has been a rotation away from cyclical stock, which tend to perform better when the business cycle is coming out of a recession, going into a boom. For example, Shares in Allianz Technology Trust (ATT) formerly RCM Technology, have fallen 10% in the past month as tech stocks have de-rated on fears of an economic slowdown and on the impact of higher interest rates. Chip makers are down. IBM's recent results were disappointing with Q3 revenue sliding 4% on top of revenue also down last quarter 3%. There are fierce price wars raging amongst the retailers in, clothing, travel and even the more defensive sectors like food. Moreover, the recent second profit warning from the world's second largest engine maker Rolls Royce, underscores the rapid deteriorating global environment. "the economic environment has deteriorated, and it has deteriorated quite quickly" - Rolls Royce CEO John Rishton.

Perhaps a profit warning from Rolls Royce and IBM revenue downgrade is a clue for what awaits us in these forthcoming Q4 revenue earnings. Already we see a rotation away from cyclical equity into more defensive less risky asset classes, which typically perform well in a downturn.

If Q4 earnings turn out to be disappointing, then that could spell the end of the secular bull market and the beginning of a bear market cycle. But again that all depends on what the central banks do.