Hop on board
01 April, 2016
I know that Easter has come and gone, but if supermarkets are still selling Christmas mince pies (yes, it's a fact) then I'm going to write about the Easter bunny! Actually strictly speaking it may not be the Easter bunny as it has been hopping around for more than three months. But regardless, it makes a pleasant change from talking bulls and bears.
Last month Jim Paulsen, strategist at Wells Capital Management, introduced the idea that we are in a bunny market and we're set to stay in it for some time. Unlike an enthusiastic bull which spikes the market higher, or a scary bear that claws the market down, a bunny market simply hops around and never really gets anywhere.
As frustrated investors around the world can attest, the first three months of this year have featured a lot of hopping, yet markets have failed to move very far from the closing levels of last year. Most of the major markets have traded in a range of 10-15% over the last three months, but will finish the March quarter in pretty much the same place as they started the year.
The bunny market is not a new phenomenon, though we haven't had a proper one since the mid-1990s when the Federal Reserve began tightening monetary policy.
According to Paulsen, bunny markets typically occur in the latter stages of an economic recovery. "Stocks initially recover aggressively after a recession. However, as the recovery matures, cost pressures, inflation and higher interest rates begin to put pressure on the bull market. This often resolves into a bunny market for the balance of many economic recoveries."
That sounds about right. We've seen stocks rally strongly since March 2009, and although we have yet to see inflation or higher interest rates, markets have largely run out of puff. The economic recovery is continuing, and despite occasional headlines to the contrary, there is no evidence that it is about to end.
It appears that the bulls and the bears have simply been replaced with a different animal.
The bulls have been displaced because the company earnings cycle is mature (without decent revenue growth, earnings cannot grow significantly) and stocks are relatively expensive, so even the most optimistic bull has had to pull his horns in. The bears have had to return to their caves because with low recession risk and continued economic recovery, there is no room for a sustained bear market. That leaves us with the bunny — no significant market declines or rallies, just a lot of hopping.
As frustrating as flat bunny markets are, they can be the very best sort of market for long-term regular savers. Although the starting and ending prices of the last quarter suggest that little money has been made, a saver who has been investing regularly throughout the period has had continuous opportunities to buy at similar price levels, with an occasional bargain price thrown in. Anyone who invests on a regular basis has a chance to obtain a better long-term average entry price, compared to those investors who try to pick a single entry point in a bull or bear market.
What Paulsen does highlight — and we think he has a point — is that in a bunny market, investment strategies can no longer be simply bullish or bearish. Buy and hold strategies may not be as successful on their own — it might pay to top up after periods of significant weakness and trim holdings after solid runs. And prudent stock-picking will likely add value — after all, the bunny is going to hop all over the place, benefiting certain businesses and industries over others.
Don't worry — we've got this bunny sorted on your behalf. We'll make sure your returns are eggstra-special!