The answer isn’t price, the price is right; the answer is ”Risk”. We have spent the last 4½ years getting a salutary lesson in risk and its consequences, including volatility, uncertainty, insecurity, fear, smashed expectations, lost time and ultimately, all that really matters, capital losses. We are fed up with losing money basically.
Even with the 82% decline in the Japanese stock market in the past 22 years there have been seven bull markets averaging 58%and lasting on average one year and four months each. Periods when the risk aversion eased enough for the herd to go back in for a trade. It can happen and when it comes to price the stage is set.
There is a lot of cash ready to invest.
- The yield gap favors equities over bonds. Yields are historically high. Gross equity yields average 7 per cent against the 10-year bond yield at 4.16 per cent.
- Equities are historically cheap. On 10.5 times forward PE. The long term average is 37 per cent higher at 14.4 times with peaks of 20 times.
- Balance sheets are historically strong.
For equities to rally, we need a catalyst, anything that turns the focus away from fear and risk to greed, or more likely, the need for a return.
It could be a bit of blue sky on Europe after the Greek deal. It could be the pitiful returns and over-pricing of fixed-interest instruments and other havens such as gold.
It could be a rally for no reason that causes a stampede. I actually thought that last week after the FOMC and Fed Reserve Bernanke, with all the positive economic reports that the US might just be the jump start, unfortunately, China reared its ugly head just a bit too fast. It will come like a forest fire, in a giant uncontrollable blaze of glory.
But more likely it is going to be the cash busting out of its seams. Consumer, investor and corporate balance sheets are all being rebuilt. The process may not be complete, but there is a lot of money ready to go. JPMorgan just announced a $US15 billion share buyback and an increased dividend. It has had enough of sitting around and has decided to put its money to work. Sound like anyone you know?
Sure, Apple just declared a 2.65 dividend for the first time and a buy back of 10,000,000,000.$ of stock. I had to write that out to see all the zeros. And they still have cash left over.
A waterfall starts with one drop. Was that it?