The last hurrah for bank shareholders
It is perhaps unsurprising that the investment markets like to use cliches when discussing market movements and market opportunities.
Phrases such as "green shoots", "the great rotation" (a new and suddenly very popular one) and "the new normal" (one that's been with us for a while) are staples of much of the journalistic and analytical writing
that discusses the broader themes in the sharemarket and investment community.
This last one – "the new normal" – has a seductive quality. It suggests that the old world or the old way is no longer applicable, and that somehow the rules have changed, perhaps for good. The problem with phrases like this is that they often oversimplify the situation, and at worst they lead investors up the proverbial garden path.
The "new normal" is more akin to the older cliche "the trend is your friend", but most investors forget to add the last three words, "until it ends". It's a warning that is likely to be unheeded also when we used the shorthand "the new normal".
Biologically, as a result of the relatively slow-moving process of evolution, human beings really aren't designed to invest well.
We have a financially dangerous habit of extrapolating the most recent past and ignoring longer-term history. While some economic and societal changes really do change the way we work and live (the internet is the most recent example), a great many more supposed "new normal" changes are little more than ebbs and flows that mark the economic cycle.
Party over for bank shareholders?
It has been investing lore for decades now that banks should be a staple of any individual investor's portfolio.
That advice has been sound because of the broader trends in the economy that have seen house prices rise like weeds, prompting a similar growth in mortgage debt, as well as our propensity to spend today and pay tomorrow, boosting our credit card debt in the process.
However, we now find ourselves in a situation where house price growth and housing construction are stagnant at best, where barbecue conversation has turned from who has the biggest house to who has the smallest mortgage. Australians are paying down credit card debt, and saving like we haven't in years.
Accordingly, bank profit growth is moderate, to put it kindly. Investors appear to be missing those signs, however, with bank shares being pushed to record levels in some cases, and to high multiples of earnings in all cases.
When Commonwealth Bank of Australia (ASX: CBA) can trade on a price earnings multiple of 15.5 times when it's cash profit growth was only in the mid-single digits, and when Bendigo and Adelaide Bank (ASX: BEN) can see its share price rally 4 per cent on the back of 4.4 per cent growth in cash profits, it's hard to escape the conclusion that investors may well be throwing bad money after good.
Stronger for longer, or primed to fall?
There is also an argument that the same is happening in other areas of the investment world, if the recent results from our major resource houses BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are anything to go by.
As commodity prices continue to take a bite out of profits, and as future resource supply growth looms, bullish resources investors across the board are still expecting the Chinese growth story to continue unabated and for supply to remain constrained.
Missing the forest for the trees
The last example, well known by now, is that of Telstra (ASX: TLS). For years, friendless, after what in hindsight can categorically be stated as an overpriced second and third tranche of its sharemarket float, Telstra shares once languished as low as $2.60.
When the new normal was accepted to be Telstra's inability to provide a successful place for investors to park their money, the company's share price rallied to within sight of double its all-time lows.
It's hard to argue with the impulse that sends investors to the sectors and companies that have shown themselves to be successful investments over the long term. Nor can you blame investors for shunning companies whose share prices have delivered nothing but hurt.
However, investors must remember that investing by looking into the rear-vision mirror is a dangerous pursuit. Until a long, straight road comes to a corner, the trend can be your friend.
For bank and resources shareholders, the past couple of decades have been kind, but investors must understand the dynamics that are changing and respond accordingly.
Attention: While bank shares have long been a portfolio stalwart, they are far from the only option for income-seeking investors. Foolish, dividend-loving investors and BusinessDay readers alike who are looking for Australian investing ideas can click here to request a Motley Fool free report, "Secure Your Future with 3 Rock-Solid Dividend Stocks".
This article contains general investment advice only (under AFSL 400691).