The Next Bull Market Won’t Be Like the Last

Things will be weak in the first half of 2023, but lower rates will be a good tailwind for the second half. By the middle of next year, we could see smoother sailing ahead.

Yan Barcelo 12 January, 2023 | 2:16AM
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Stacking Coins

All through the market’s downward spiral since January 2022, investors have tried to buy the dip in yesterday’s stars, mostly large-cap technology stocks. But the ground has shifted.

“The last bull cycle, which was great and kind to investors, had a lot of help. Disinflation and low yields enabled central banks to stimulate whenever the economy or markets wobbled. Until near the end, geopolitical risks were low. Globalization trends remained strong, with steady gains in supply chain logistics encouraging outsourcing,” wrote Craig Basinger, Chief market strategist at Purpose Investments, in a recent report.

That whole background has shifted, he points out, as we move from quantitative easing to quantitative tightening, from globalization to isolationism, from disinflation to inflation, from monetary excess to fiscal excess, from borrowers to lenders, and from low yields to ‘normal’ yields. All those forces contribute to shape a different portfolio.

“We’ve seen this in every past cycle: leaders change,” he asserts.

Will Your Portfolio Today Stand Up to Tomorrow’s Market?

 “If you look at a portfolio today and how it’s been built, it has more likely been built according to how the last cycle ended. If the next cycle is going to be different, you have to ask yourself: ‘does my portfolio make sense?’” he says.

According to Basinger, these are some features investors can expect:

  • Larger economic swings,
  • Faster, shorter cycles,
  • Inflation to be more persistent and volatile,
  • Heightened focus on diversifying supply chains,
  • Increased bargaining power on the part of labour,
  • Higher wage pressures than before, and
  • Higher cost of capital.
  • What does this mean for your portfolio?

Value to Take the Lead Over Growth

Coming into 2022, we noted that technology was one of the more overvalued sectors,” wrote in a recent note David Sekera, Morningstar’s Chief U.S. market strategist. “Yet, after falling 25.29% for the year to date, well in excess of the broader market’s decline of 14.39%, we think the pendulum has swung too far and that the sector is attractive for long-term investors,” he adds.

Despite this, chances are that the notorious FAANGs (Facebook, Amazon, Apple, Netflix, Google) won’t be leading the pack anymore, a point on which both agree Basinger and Philip Petursson, Chief investment strategist at IG Wealth Management. “They (FAANG stocks) have become behemoths, and at their size, growth becomes more difficult to achieve,” Petursson explains.

Instead, value stocks will take the lead, agree Basinger and Petursson. More broadly, “the new leaders will be companies that were starved of capital in the last cycle and who had to become lean and mean to attract capital,” Petursson claims.

Investors Could Find Opportunities Outside the U.S.

In this new era, high interest rates will usher in a period of hard-earned economic value. “Earnings growth won’t be manufactured as it was in the last cycle, Basinger says. Companies will have to grow their business more to see earnings growth.” At the same time, we should expect earnings growth to be more subdued.

Higher interest rates will also prompt investors to pay more attention to companies’ balance sheets. “If we have more volatile inflation and economic growth, leverage does become more dangerous,” Basinger highlights.

In the last cycle, the U.S. markets clearly dominated. Any investor who lacked presence in the U.S. largely missed out on most of the potential growth. Petursson thinks the next cycle will be largely outside the U.S.. “It’s not that U.S. companies won’t do well, but the bigger opportunity gains will be outside the U.S., in international, emerging markets and Canadian equities,” he says.

He adds that longer-term opportunities lie in countries that have a cheap currency as well as cheap equity markets. “The U.S. dollar is overvalued, whereas Europe, Japan, and even Canada, to some degree, appear attractively positioned with an undervalued currency and undervalued equity markets in relation to the U.S.,” he says.

What About the 60/40 Portfolio?

Finally, the 60/40 portfolio should recover some of its previous status. In fact, considering the improvements in equity and fixed income valuations over the course of 2022, the valuation models of Philip Straehl, Global Head of Investment Management Research at Morningstar Investment Management, suggest that the 60/40 portfolio stands to deliver a return after inflation of 3.6% over the next two decades, a 1.6 percentage point improvement from a year ago.

Investors want to know when the next bull run will start. Though he doesn’t subscribe to notions of bull and bear markets, but rather thinks in terms of intrinsic value, Sekera points to the moment when the turning point could happen. “We expect still very volatile markets over the next six to twelve months, he says. Things will be weak in the first half of 2023, but softer inflation will drive the Fed to ease monetary policy. We expect rates to come down again, and that will be a good tailwind for the second half. By the middle of next year, I can see smoother sailing ahead.”


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About Author

Yan Barcelo  is a veteran financial and economic journalist with more than 30 years of experience, Yan writes for many publications in Toronto and in Montreal, including CPA MagazineLes Affaires and Commerce.

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