The roller coaster ride on equity markets is enough to send your head spinning with many investors questioning if this is the end of the bull market.
The sharp fall in the share prices of tech darlings both in the US and Australia is sapping confidence.
It's not only the crash in the Tesla Inc (NASDAQ: TSLA) share price along with other FAANG favourites that I am talking about.
Tech standing on the neck of the bull market
The pullback in the Afterpay Ltd (ASX: APT) share price, Appen Ltd (ASX: APX) share price and Xero Limited (ASX: XRO) share price are also rattling the bull market cage.
The rest of the S&P/ASX 200 Index (Index:^AXJO) hasn't faired too well either. It retreated around 1% for the week and shed 5% since hitting its COVID-19 high less than a month ago, thanks to a pleasing August reporting season.
Is the bull party over and should you be taking profits now? I don't think we are at a sinister turning point, but I will admit this call is a bit of crystal ball gazing on my part.
Bears still yielding to bulls
But there are three things my crystal ball is showing me to support the belief that ASX investors should stay hold the line.
The first is the yield curve. This is the difference between the two-year bond yield and the 10-year yield on US government bonds.
While equity markets were whiplashed and volatility spiked, the gap between the two yields remains more than 50 basis points apart.
The fact that the 10-year is providing a fatter return than the 2-year is promising. The curve tends to be steep when credit markets are anticipating growth and curve flattens, or even inverts, when the outlook sours.
Earnings still positive in uncertain world
The second point is that company profits are still growing on the most part. This is true for the ASX as it is for the US share market in general.
The "good performance" for ASX stocks is no doubt artificially bolstered by government handouts, but analysts are still tipping earnings growth for FY21 when these measures mostly expire.
I doubt we will slip into a bear market when earnings are expanding, even though the growth isn't particularly exciting. But hey, growth is growth.
Least dirty shirt
The third reason I think the bull market will survive is the lack of alternatives. Love them of hate them, equities are still the best major asset class for Australian investors.
If you did cash in your chips now, where would you put the cash for the medium to longer-term? Credit investments aren't dead (and may even outperform in the short-term if the RBA cuts rates to 0.1% as some speculate), but shares still offer the best risk-reward, in my view.
ASX 200 correction still a strong possibility
However, there are two caveats to my optimistic outlook. The first is that the ASX 200 may drop into correction territory in the near-term.
This means there may be another 5% plus drop for our market if this happens – and that's a good reason to keep some powder dry.
Rotation from growth to value not over
The second is that the dramatic price-earnings (P/E) expansion that boosted many market darlings is probably over as we move into a "late-stage" bull market.
I know this prediction was made before and proved to be wrong. But there have been recent signs of this transition.
As the bull market pushes on each week or month, it increases the probability that value stocks will dominate.
