Gains may be tougher as the bull runs into the late cycle
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Insights and Market Perspectives

Gains may be tougher as the bull runs into the late cycle

Author: Kevin McCreadie

October 17, 2018

The recent selloff in equity markets may not signal an immediate end to the bull run, in fact markets have largely seen positive returns this week, but further gains are only going to get harder to come by at this late stage in the cycle.

In some ways, last week’s market roiling was déjà vu all over again. In February, the Dow Jones recorded its largest one-day rout on record as markets were spooked by a hot jobs report and the spectre of rising rates, sparking a rare selloff in both bond and equity markets.

This time, it’s again not the current absolute level of interest rates, but rather the speed with which long rates are moving up and the potential for a further spike in long yields that’s rattling investors.

This combined with the ongoing trade and tariff talks and some seasonal weakness (they don’t call it Red October for nothing) proved to be a lot for markets to stomach.

These worries are bubbling to the surface as corporations begin posting third-quarter earnings—more signs, perhaps, that we are nearing the end of the cycle.

A number of companies have begun to express concerns about a coming squeeze on profit margins. Specifically, there’s been a lot of chatter about tight labour markets leading to wage increases, and how looming tariffs might impact input costs. There’s also worry that if the economy is this hot, the U.S. Federal Reserve is going to raise rates even higher—and in an effort to really cool things down—may over-tighten a bit.

This week is important as we gauge the reaction to earnings coming in. While many companies have been posting solid profit growth this year, investors have been largely unimpressed and multiples are contracting.

Do investors continue to reward growth, albeit to a lesser extent, or do worries about future headwinds overshadow this?

We’ve seen growth outperform value throughout this market run. But when you get this late in the cycle, companies aren’t growing as fast. And as we’ve said recently, we’re now at a point where we may see value outperform growth, and we certainly saw that flip in the markets last week.

So as we consider all of these factors this late in the cycle, there is likely still some additional upside, but investors are discerning and picking their spots carefully.

Kevin McCreadie is President and Chief Investment Officer at AGF Investments Inc. He is a regular contributor to AGF Perspectives. 


Commentaries contained herein are provided as a general source of information based on information available as of October 17, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

 

 

 

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit AGF.com.

© 2018 AGF Management Limited. All rights reserved.

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