Thursday, June 26, 2014

How to be bullish and bearish, part 2

In a past post, I had outlined my long-term concerns for US equities, though I remain relatively constructive on the intermediate term outlook for stock prices (see How stocks are both cheap AND expensive).

Belski long-term bullish
Now BMO strategist Brian Belski has taken a mirror image of my views, which is long-term cautious but short-term bullish, with a long-term bullish but short-term cautious stance. First, Belski explained his bullishness based on the thesis that we are seeing a secular bull market after a Lost Decade and therefore long-term equity return expectations of 10% are plausible (via FT Alphaville):
Secular Bull Markets Are Born Out of Lost Decades: Based on historical evidence, stocks typically enter a very long period of expansion after emerging from a period of negative 10-year holding period returns. We found that, on average, these periods last for roughly 15 years and deliver average annual returns of about 16%. Given that 10-year holding period returns emerged from negative territory a little over five years ago and currently stand at 5.5%, it is not unreasonable to assume that there is about 10 years and 10% of average annual returns left to the current bull market should performance follow historical patterns.

Short-term cautious
On the other hand, Belski was featured in a recent Financial Post story with the title "5 signs Canadian stocks are frothy", namely:

  1. Forward P/E ratios are near the highest level since 2000
  2. More than 35% of TSX companies are hitting 52-week highs
  3. Volatility is at a record low
  4. Stock performance is significantly outpacing underlying commodities
  5. Recent TSX outperformance has been highly concentrated in energy stocks
Now I recognize that the Canadian stock market is not the same as the US market, but the two economies are tightly bound to each other and the returns of the two markets have shown a high degree of correlation.

While I disagree with Mr. Belski's conclusions (see my previous post How stocks are both cheap AND expensive for the reasoning), but this is another example of how someone can be both bullish and bearish at the same time. It just depends on your time horizon.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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