The current bull market has a lot further to run thanks to accommodative central banks, ‘baby boomers’ needing to invest and question marks over when it actually began, according to investment firm IG Group. 
Head of market analysis Chris Beauchamp said the base case for equity markets continuing its strong rise could be found in the bond market, where yields remain at all-time lows while business confidence is on the rise.
“When we talked six months ago there was this whole comment over whether bond yields were on the cusp of rising and the turn was finally at hand,” Beauchamp said.
“Lo and behold, we find ourselves six months or so on and the US 10-year yield is yet to get anywhere near 3 per cent and shows no sign of turning around.”
As the below chart shows, US Treasuries have been on a strong run since the financial crisis in 2008, up by 49.58 per cent over the last decade and has failed to move significantly in recent months.
Performance of index over 10yrs
Source: FE Analytics
While this trend was supposed to be ending soon, Beauchamp said “trends go on much longer than you ever think possible and it remains the case with this”.
“This foundation if you like – the constant decline in yields – is really my base case for the stock markets, i.e. they will keep going up over the longer term,” he added.
This ever low-yield environment has led to few investors wanting to invest in bonds, with many instead turning to equities to eke out a return, the analyst noted.
Beauchamp said: “You have vast armies of ‘baby boomers’ who need their pensions funded and if you’ve got bond yields at record low levels (and continuing to be at record low levels for an extended period as there is no real sign of that turning around) you have to be in the stock markets.
“And that if nothing else provides with you with that constant floor or constant inflow of funds with pension and fund managers happy to stay in stocks despite what they think about the outlook for the US, Brexit, the European economy or anything really.
“We think this symbolises what will happen in financial markets [going forward] with confidence high but yields somehow remaining stubbornly low.”
When it comes to equities, some investors and analysts have mooted the idea of a recession or market correction as the cycle appears to have been running since the financial crisis in 2009 but Beauchamp disputes this.
“I have a particular bugbear about when you date the current bull market,” the analyst said. “A lot of people will date it from 2009 and I keep arguing that actually it’s not that at all.”
“That is simply the rebound from the lows of 2008/2009 but the new bull market as we properly understand it only begins when you break out of the highs of the last one and that took place in the early summer of 2013.”
Performance of index over 15yrs
Source: FE Analytics
As the above shows, the S&P 500 has risen since its lows in 2009, which is when many believe the current bull market started, but did not pass the previous highs until 2013.
“So we are now four years into a bull market not eight years and I constantly remind people of this fact,” he said. “We haven’t had an eight-year bull market and are not therefore overdue some sort of correction.”
The analyst added: “I think the problem with the fact you had the sell-offs in 2000-2001 and 2008-20009, is that people have been conditioned – at least over the last 20 years – to expect some kind of massive stock market rout every seven-to-eight years.
“People are now sitting there thinking surely we are due another one – well clearly I don’t think we are.”
He points to the last secular bull market, which began back in 1983 and went on for almost 17 years with the S&P 500 returning around 7 per cent per year, as a guide for how long this market could last.
“So if we are looking at that we are only just into the next long-term bull market,” Beauchamp said.
“If this is the second longest bull market and biggest since 1978, then while clearly we’ve gained a lot of ground already [there is more to come].”
Yet the issue for many investors is that this has led to a sharp rise in valuations in the US as well as in many other major markets forcing many to remain invested in the low-yielding bond market.
He added that despite central banks looking to tighten their monetary policies, investors will remain invested in bonds, keeping valuations high over the longer term.
“You’ve got people continuing to move into bonds because they think that stocks are somehow risky and the environment doesn’t warrant the worries over valuations,” Beauchamp said.
“People remain fundamentally bearish I think. They remain fully expecting further crises along the way.”
“But I think the lesson of 2016 from almost a purely price perspective that you had crises along the way and you had major market sell-offs but every time they sold off – be that the China crisis in the early part of 2016 be that Brexit or the US election –the market came bounding back again.”
Indeed, as the below chart shows, over the course of the year the global equity market ended 2016 higher, despite several macroeconomic factors causing momentary blips.
Performance of index in 2016
Source: FE Analytics
Overall, he said a key barometer for whether the market genuinely does have a lot further to run is in the smaller companies space – a good marker for investor risk appetite.
“Back in December I said to keep an eye on what small-caps would do as they were always a classic gauge of risk appetite in my opinion,” he explained.
“This year they’ve not had a fantastic time, the Russell has been a tortuous range-bound trade but we saw it edge to new highs just a few weeks ago.
“If you do see a breakout over the next few weeks that is another sign that this market continues to be in a very rude state of health.
“They are always a good indicator of where the market is headed and the fact that they’ve been so range-bound is a disappointing sign but I’m not sure that their run has come to an end.”