In their November 29 investment letter, Tony and Rob Boeckh re-iterate their view that U.S. stocks are in a secular bull market that began in March of 2009. Their investment recommendation, therefore, is to keep moving cash into the market opportunistically, during bouts of weakness.
In contrast, the consensus holds that a secular bear market prevails. Indeed, fewer than 10% of more than five dozen investment books on sale in bookstores take a bullish stance, according to a survey by the two analysts. But that’s fine with them because longstanding and widespread negativity is a hallmark of the early stages of secular bull markets.
The secular bears say valuation is too high: the Shiller cyclically adjusted price-earnings ratio, for example, is currently at its fifth highest reading ever. But the more important yardstick for the Boeckhs, the S&P earnings yield gap (which compares earnings per share to bond yields), is showing extreme undervaluation.
While the headlines are full of pessimism, positive things are going on under the surface. Notably, the Boeckhs say America’s competitive position continues to improve. “If we look at a combination of the impact of exchange rates and unit labour costs, the competitive position of the U.S. manufacturing sector has gained dramatically in comparison to virtually all major countries,” they write.
Another area where the U.S. has gained an upper hand is energy, thanks to the technological revolution in horizontal drilling and fracking that has unlocked tight supplies of shale gas. The consequently lower cost of energy within the U.S. will bestow further competitive advantages. And the more than a dozen liquefied natural gas terminals in various stages of construction in North America should be a source of export-led growth.
One or more of the problems currently in the headlines could boil over and cause stocks to sell off. But those downdrafts should be bought. In addition, the Boeckh’s conclude, “quality companies with good balance sheets will continue to be the premier asset class to protect and enhance wealth positions over the long run.”