In this environment, one would expect a little joie de vivre. Yet,
for many, all of this has been met with a shrugged “whatever” response.
Volatility has been low. Turnover has been low. And, this is the only
multi-year bull market in history where trading volumes are declining
rather than increasing.
What’s happening? Behavioral psychologists would point to 2008’s global
financial crisis and, since then, the lingering presence of what they call
recency bias – the greater weight that recent experience can have on our
decision making. The effect is even more powerful when recency is combined
with salience – the more something means to you, the more vivid your
recollection of the event.
Prior to the crisis, investors largely underestimated the probability of
such an event precisely because they had no personal experience of one (the
most comparable precedent occurred in the 1930s). But then the opposite
occurred. Since 2009, many investors, hostage to their recent and vivid
crisis experience, overestimated the probability of a recurrence. In large
part, this explains the broad apathy toward stock markets.
However, there is solid evidence that all of this lingering risk aversion
is finally fading as the global economy gains more traction. Risk appetites
are now returning with zeal. And why shouldn’t they?
The record-breaking streak of gains in global stock markets in 2017 has
been supported by the broadest global growth in a decade. For the first
time since 2008, all 45 of the largest economies tracked by the OECD have
been in a synchronized expansion. That economic momentum has lifted
earnings per share for global corporations above $30, a level first reached
about 10 years ago.
Where to next? The next phase of the global recovery will close the wide
cyclical gap that has opened up between the U.S. and the rest of the world.
While the U.S. started recovering almost immediately in 2009 (providing a
monetary roadmap for global policymakers along the way), many other
economies have been stuck in grinding recessions and are now only starting
to lift off. This still has a long way to run.
To be sure, this has been a long cycle, particularly for the U.S. At 8.5
years, it ranks third out of 33 cycles recorded since 1854. But the
attendant bull market has been a strange and melancholic affair…seemingly
better slouching apathetically on a therapist’s couch than splashed all
over the cover of Barron’s. And why not? Since 2008 global
investors have endured rolling geopolitical concerns, dramatic elections,
viruses, Brexit, terrorist attacks, Trump’s erratic twitter feed, etc. Many
investors have been happy to sit this one out. But stock markets have been
incredibly resilient, at least in the U.S.
Now try to imagine what happens if the data actually turn positive
everywhere around the world. While we are not rabid bulls on global growth,
a mild and, importantly, globally-synchronized recovery has taken hold. But
with enthusiasm for risk-taking finally making a comeback, expectations
have become higher. That means this next growth stage in the post-crisis
period will need to provide an encore with even more lively entertainment:
Robust momentum and profit growth will need to show up quarter after
quarter. Otherwise, many investors will just shrug and respond with an “Oh
well, whatever, never mind.”
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
. Follow Tyler on Twitter at
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