End of the bull market?

THERE seems to be a trend among chief economists to call the turning of the equities market. The latest to do this is David Hudson, of Merrill Lynch Investment Managers.

In his latest analysis he says that under the company’s valuation approach, the case for equities against bonds is now compelling.

He does make the point that equity markets may have one further leg down and government bonds a final rally as the risk aversion among investors reaches its zenith, but in his view, relative valuations are expected to normalise in the coming months.

Mr Hudson cites Wall Street Guru, Abby Cohen, who points out that the risk in equity markets now is much lower than in the early part of 2000.

Merrill Lynch’s economic analysis shows that the fears of a hard landing are now over-blown.

The traditional leading indicators such as housing are holding up remarkably well.

The commitment that the Federal Reserve has shown in ensuring the bounce-back in that economy also provides for some confidence.

Of course, in the interim, we will continue to see profit downgrades and other worrying aspects of economic data being released.

The surprising feature that Mr Hudson points out about the market is that the “sweet spot” for equities is usually when both interest rates and earnings are falling.

He points out that the reason for this is that when interest rates are first cut, the economy is still slowing and it takes some time for the increased liquidity to be absorbed by the real economy.

During this period increased liquidity instead flows into financial markets, driving them higher.

In Merrill Lynch’s view, to get bearish on equities at these levels is to take the view that the Fed’s actions will not work and that the bull market we have had for so long is finally over.


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