- Strategists at Morgan Stanley have put together a guide on which assets are most consistent with the final stages of a bull market.
- “Our current environment of rising inflation, strong data, tighter policy, flatter yield curves and more volatility is consistent with a late-cycle market,” they said.
The agreed definition of a bear market is a 20% decline from the most recent high.
But it’s not as straightforward to predict when a bear market is looming. Moreover, the bear markets in the 1980s crash, the dotcom bubble, and the 2008 financial crisis were all preceded by strong final rallies.
Strategists at Morgan Stanley have put together a guide on which assets are most consistent with the final stages of a bull market.
“Our current environment of rising inflation, strong data, tighter policy, flatter yield curves and more volatility is consistent with a late-cycle market,” said the team of strategists including Serena Tang in a note on Sunday.
“But late-cycle doesn’t necessarily mean every drawdown must be ‘the big one’ — looking at S&P, the market for which we have the longest history, since 1950, bull corrections (10%+ declines with quick recoveries) have happened almost twice as frequently as bear markets for the S&P, with the two having very different recovery trajectories and incentivizing very different strategies.”
The strategists examined the trailing six-month and 12-month performances of major assets, and compared them to returns in the same timeframes during the run-up to previous bull market peaks.
In the stock market, every region seems consistent with a late-cycle market except emerging markets and Europe, which have lagged their usual performance in the 12 months going into a market top. And on a sector basis, telecom, tech, and energy stocks aren’t as strong as they typically are at the late stages of a bull market.
The outcomes are less mixed for the corporate-credit market. “Interestingly, most of credit looks out of line with a late bull market environment, having outperformed materially over the last 12 months versus what’s usually seen in the run-up to equity tops,” Tang said. Notably, she added, US high-yield credit rated BB, and European debt rated BBB are the best outperformers, meaning they’re also more vulnerable in a late bull market.
Like corporate debt, US Treasurys have outperformed relative to the late-bull-market environments Morgan Stanley studied.
The dollar’s slide since late-2016 lines up with late-cycle behavior. But according to Tang, the 12% decline over the past year, which was partly driven by stronger economic growth in other countries, “is an extreme move.” The euro, pound, Malaysian ringgit and peso have all gained more than usual in a late-cycle, Tang said.
“Most other currencies are consistent with a late-bull market backdrop.”