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.
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