- As the stock bull market approaches its ninth birthday, many investors are wondering when would be the proper time to take profits and leave equities.
- Bank of America Merrill Lynch warns against exiting the stock market too early, and argues it's better to get out too late than too soon.
When it comes to an equity bull market, much is made about when it's time to hit the exits. And it makes sense that people pay such close attention, because no one wants to be the last man standing as stocks come crashing down.
But Bank of America Merrill Lynch wants to address a less-discussed and possibly perilous outcome: leaving the stock market too soon.
On the surface, it may seem better to be safe than sorry. But BAML argues it actually costs investors more to leave too early than too late.
As the chart below shows, leaving stocks six months early costs a trader 14%, on average, compared to the 10% hit they'd absorb exiting equities six months late:
Bank of America Merrill Lynch
"Turning defensive early can be costly," James Barty, the firm's head of global cross-asset and European equity strategy, wrote in a client note. "The conclusion is pretty clear: investors should not cut their equity exposure early unless they're very confident that the end of the cycle is nigh."
To that end, it's very much Barty's view that the almost nine-year bull market in US stocks has further to run. And his outlook stems largely from his disagreement with one commonly cited bearish argument: that inflation is rising quickly, which will inevitably put pressure on stocks.
Barty notes that inflation "has room to rise," while pointing out that a measure known as the "OECD output gap" - calculated as the difference between actual and forecasted gross domestic product (GDP) - is also well below historical peaks.
"Everything we look at suggests that strong global growth remains intact," said Barty. "There is room for global growth to continue to run above-trend for some time. We suspect the end of the cycle is still some way off and we are therefore happy to continue to run our equity exposure, accepting that it will likely be a bumpier ride than in 2017."
Bank of America Merrill Lynch
Other strategists on Wall Street have highlighted similarly encouraging bullish arguments on US stocks in recent days. Dubravko Lakos-Bujas, JPMorgan's head of US equity strategy, says companies in the benchmark S&P 500 are on pace to execute more than $800 billion in gross share buybacks in 2018, which would shatter the previous annual record.
Considering buybacks have been a safety net of sorts for the stock market through the almost nine-year bull market - since they provide price accretion during periods devoid of other positive catalysts - this is great news for stock enthusiasts.
Still, regardless of when bulls do eventually decide to exit the stock market, they'd better make darn well sure the cycle is on its last legs.