With the global bull market in equities entering its 10th year we have, since the financial meltdown of 2008, lived through an era of long-term positive investment returns. No matter what has been thrown at these markets over that time, they have (almost) serenely sailed on to new highs. Volatility has all but disappeared and investment returns have been remarkably consistent for managed style portfolios. This is great news for investors if everything continues as it has over the past 10 years.
The US market has been the lynchpin that’s driving this global rally, not China, not oil and not Bitcoin. The long-term gains made over the last 10-year bull-run have been outstanding, but the short-term rally in 2018 has taken many commentators by surprise. Even for the battle hardened, a 1,000-point rally in 9 trading days on the Dow Jones is heady stuff. The headline US index - the S&P 500 - has in the first 18 days of 2018, managed to put on 5.2%, leaving many commentators asking what comes next.
So, the $64,000 question is this - with the present surge in the US equity market (which interestingly is absent from both the UK and European markets), is it a forerunner of a very strong period of US growth, or the classic over exuberance pre-warning that an “end of cycle” correction is around the corner?
Many fund managers are cautiously optimistic and see many reasons why equities still offer the best medium-term investment play in the US. With three expected rate rises in the US this year, the government is not, at this point, high on investors’ watch list. What’s grabbing investors’ attention this year, are earnings fundamentals over that of macro, politically charged sentiment.
The facts of the US market are, therefore; earnings are beating forecasts, Trump’s tax cuts will boost capital expenditure and feed into bottom line profits, US consumption is only getting stronger, and almost everyone has a job. No surprise then, that GDP growth is strong relative to inflation, which in most economics books is termed a “Goldilocks Environment”.
For many fund managers, equities are the only serious player for investment returns but the risks are increasing. There is an increasing view that after such a strong rally, should it continue crashing through records, there will be a point, much like an overheating pressure cooker, when the US equity market will need to let off steam. The faster the US goes up, the more volatile the markets are likely to become, and of that we are mindful.
We do not portend the immediate end of the bull market, simply because the fundamentals are just too strong to de-rail the rally. But a word to the wise, an element of over valuation is warranted and we will be looking to reduce risk for clients through retaining good cash levels within portfolios, plus focussing on investing into quality investments which are more likely to better handle a future market downturn.