Stocktake: Is the bull market taking a breather?

US stocks gained last week, but it has been an iffy 2015 for the S&P 500, which has badly underperformed other developed markets. However, there is little evidence the six-year bull market is ending.

Weakening market breadth is the key indicator of a tiring bull.

At market peaks, many stocks will already have suffered large declines, but indices may be propped up by strong performances from the largest companies.

That’s why just 63 per cent of stocks were above their 200-day moving average at the 2007 peak and an even smaller number at 2000’s bull market high.

Today, the vast majority of stocks remain in healthy uptrends; at December’s high, 79 per cent traded above their long-term average.

The recent to-ing and fro-ing may simply mark a return to normalised trading. Pullbacks have been short and shallow since 2013, with nine V-shaped rallies taking place.

That's extraordinary; money manager Dana Lyons recently noted that just 40 V-bottoms occurred between 1950 and 2012 or about once every 18 months.

The era of V-shaped rallies could be over, but the US bull market remains alive.

CRH optimistic on synergies

Investors last week cheered CRH's announcement that it was buying €6.5 billion of assets from LafargeHolcim, shares enjoying a double-digit rise. However, large-scale acquisitions rarely live up to expectations. To quote valuation guru Aswath Damodaran (inset), "more value is destroyed by acquisitions than any other single action taken by companies".

There are many reasons, one being that companies often overestimate potential synergies. One study, Do Synergies Exist in Related Acquisitions?, did a meta-analysis of 67 previous papers on the subject. The consensus is that synergies tend to be “negligible”; shareholders are “best advised to doubt promises of synergies made by executives”; expect positive results “under specific conditions only”.

CRH envisages synergies of €90 million “across multiple categories” within three years. That may seem modest – they total 1.8 per cent of sales – but the eventual reality may be more modest again.

Women desert investing world

The number of female fund managers in the US has fallen every year for the last six years, the Financial Times reported last week, from 10 per cent to less than 7 percent.

Efforts to redress the gender imbalance are clearly failing, which is bad news on multiple levels.

Plenty of data suggests women are less vulnerable to investing vices such as overconfidence and overtrading.

Hedge funds headed by women habitually outperform. Ordinary female investors outperformed during the global financial crisis, according to Vanguard, as they were less likely to be spooked into selling.

Work by Cambridge neuroscientist and former trader John Coates suggests testosterone can lead to irrational exuberance and market crashes.

A greater presence of women (and older men) might, as Coates argues, promote less overtrading and better long-term planning.

Six years after the global financial crash, however, and the investment landscape looks more, not less, male-dominated.

Sticking to a wrong consensus

Almost all – 96 per cent – institutional investors expect the S&P 500 to rise in 2015, according to a new survey by consulting firm NEPC.

The results are less euphoric than they appear. More than nine in 10 expect modest 0 to 10 per cent gains. Just 5 per cent expect gains to exceed 10 per cent.

This may sound reasonable, given markets’ average annual gains of 9-10 per cent.

However, wild swings are the norm.

Historically, indices have risen or fallen by at least 20 per cent in more than 40 per cent of all years. Over the last 86 years, returns in the 0 to 10 per cent range occurred on just 14 occasions.

In other words, one rarely sees 0-10 per cent returns, yet almost every institutional investor is predicting exactly that.

The truth is, they haven’t a clue – no one does.

Rather than admit that, however, it’s deemed better to cough out a safe, sober figure, sticking to a consensus that is almost certain to be wrong.

It’s the boring days that count

Volatility energises and unnerves investors. Recently, the S&P 500 rose or fell by more than 1 per cent on six out of seven days, providing headlines aplenty for the financial media.

You don’t hear about the days when indices eke out tiny gains, but the big moves are less important than they seem.

Since 1932, notes blogger Eddy Elfenbein, stocks have enjoyed daily gains exceeding 1.17 per cent on more than 1,900 occasions, while there were some 1,800 daily losses exceeding 1.17 per cent.

Combine all the big moves, and they almost perfectly cancel each other out.

“In other words, all those high-volatility days add up to nothing,” says Elfenbein.

The enormous gains of the last century have come from the boring days.

“The rest is just noise.”