On The Cusp of a New Secular Bull Market?

It’s the first week of trading of 2015 and the stock-markets have been going down, then up, up and away. This makes me wonder whether we might just be on the cusp of a new secular bull market.

So why are the bulls charging?

For some pundits the motive is that Mario Draghi, Govonor of the European Central bank, is going to kick start a new massive one trillion euro round of quantitative easing (QE).

The Eurozone is officially in deflation and some pundits are jumping up and down saying, come on, do something. So what else can the ECB Governor do but pump the system with more liquidity?

But don't hold your breath waiting for QE because it might just not come as soon as you think.

Don't expect QE to prop up the market in 2015. Last year was a QE orgy, but it may not play out like that this time around.

When the bears came charging out at the bulls, the central banks would come to the bulls rescue with a QE fix. Maybe the central banks had to play it this way. After all, the economic fundamentals weren't strong enough to keep the bulls running. The financial market was like the central banks perpetual motion machine. When it looked like it was running out of momentum the central banks would pump it with QE.

Stocks were rising and it just didn't make sense. We had a situation of negative divergence, the economic fundamentals heading south and the stock markets going north.

But this year we may start seeing fundamentals, particularly in the eurozone starting to pick-up with some momentum.

Why the optimism?

The wild card, lower oil prices (an engineered crash in oil prices) are now showing some early signs of boosting consumption. German retail figures support this view with sales expanding by 1.0% on the month in November, according to the statistics office.

Furthermore, there’s historic evidence to support the view that cheap oil accommodates a boom for economies that are consumer, manufacturing based. Alternatively, during periods of high oil prices, such as the early seventies, these economies experienced sharp recessions. There is a correlation between oil price and the economic cycle. Low oil price, the economy booms, high oil price the economy goes into recession. This is the case with consumer, manufacturing based economies.

So the argument that the EU might experience an upturn in its economic cycle in this new environment of low oil prices is beginning to hold water.

What about the 0.2 percent deflation in the Eurozone? Surely that should be enough ammunition for the the ECB Governor, Draghi, to kick start his massive trillion euro QE program.

It is not as bad as it looks. Why? Employment is buoyant in Germany and starting to pick-up in some parts of the peripherals, such as Spain. Moreover, there are signs that consumption is starting to gain momentum in Europe's largest economy, Germany.

So the disappointing deflation figures are not down to deteriorating consumption during that period, but rather due to falling input costs, particularly oil and commodities.

In other words, don't read too much into a set of disappointing euro bloc Consumer Price Index (CPI) figures. As consumption picks up momentum moving forward, it should drive demand and push prices back into positive territory. It is just a question of time. 

So this year the euro stock market is likely to have better economic fundamentals to keep it propped up. It's unlikely to need the crutches of QE.

The next few weeks will be crucial, now the Greek election is done, how that plays out will probably determine whether the EU needs a shot of QE.

The last piece I wrote, “A Greek Play”, provided some insight into the saga.

Across the pond the Fed has given the bulls the green light. No rate hike until 2016? That is what Charles Evans, president of the Federal Reserve Bank of Chicago, said he wants.

So a new secular bull market?

Apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Certainty, the fundamentals are starting to look brighter.

But there is no guarantee that improving fundamentals equate to higher stock markets going forward.

Sometimes the fundamentals can improve and the stock-markets go the other way. That would be positive divergence and a signal to buy. There's a lot of cash sitting on the side-lines, a little good news or a good reason for hope could get the party rocking.