Timing the markets without a crystal ball
The US stock market has been on a bull run since its trough post-crash in March 2009. The S&P 500 index almost reached 3,000 at its peak at the end of September, an increase of over 300%. This is despite the anti-free-trade rhetoric that caused a jitter in February this year and punctuated the phenomenal performance of 2017 and January.
A question mark hangs over the longevity of these elevated valuations and the precise point of the economic cycle at which we find ourselves, as western central banks begin to unwind their bloated balance sheets after years of quantitative easing and raise interest rates. Robert Shiller’s cyclically adjusted price to earnings ratio (a P/E ratio using a 10-year moving average to smooth out the business cycle) has current valuations higher than at any point in the past 137 years (excluding 1929 and the dot-com era). (Source: Financial Times, https://www.ft.com/content/b13de8f4-ce02-11e8-b276-b9069bde0956)
Moreover, 10-year Treasury yields have breached the salient 3% mark since the start of the year and are currently at 3.2% (Source: US Department of the Treasury, https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018) which, for some, tips the balance of the trade-off between holding bonds and growth assets. So, it comes as no surprise that investors locked in gains and a sell-off commenced: The S&P 500 shaved off over 10% during October’s selloff. (Source: Reuters via Financial Times, https://markets.ft.com/data/indices/tearsheet/charts?s=INX:IOM)
All of this comes against the backdrop of (perhaps ostensibly) strong economic data in the US, with unemployment at a historic low and growth as well as corporate earnings high (Source: Financial Times, https://www.ft.com/content/96c9ab26-ba50-36d8-985d-34241bdee72c). Globally, Argentina and Turkey caused worries and Italy has once again stoked fears of the Eurozone’s integrity with its Commission defying budget deficit. Meanwhile at home, the outcome of the Brexit negotiations continues to define our currency’s strength, with movements of 200 basis points in a single day vis-à-vis the dollar not altogether unfamiliar.
The last 12 months of a US bull run has typically delivered decent returns of 15% on average and so timing an exit is, as ever, fraught with uncertainty. With valuations so high in the States, expected returns are higher elsewhere. Where will they appear next? That’s anyone’s guess, which is why a globally diversified portfolio is so important. Time invested is more likely to provide a positive return than timing the market – the latter can lock in losses for investors without a crystal ball.
FT, Reuters and US Treasury
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