US-China trade negotiations and positive noises on interest rates from the Federal Reserve. Even talk of a sharp economic slowdown in Europe hasn’t held share prices back thanks to some helpful corporate earnings surprises. In previous years, for better or worse, we would have seen commentators crow about such a constructive start to the year. Not this year, though, and that can probably be attributed to two factors.
First, there is a surfeit of other news to keep people occupied: the UK’s political nervous breakdown over Brexit and President Trump’s unpredictability being two
of the most prominent.
Second, increasing nervousness among investors, fearful that the record bull market is about to come to an end. The final months of 2018 saw the worst quarter of outflows from retail investment funds since records began. Fund sales figures showed retail investors pulled £6bn from UK funds in the last three months of 2018.
Late in the cycle
The turbulent moves in markets in the final months of last year were clearly the final straw for some. However, we believe that investors should ignore the siren calls encouraging them to pull money out of equities.
Large corrections, or bear markets, are typically associated with global downturns, which themselves are usually the result of a US recession. Some investors have become fearful that the world economy is on the brink of slipping into recession purely because we are late in the growth cycle.
We believe these fears are overblown. While recessions are hard to predict we do have indicators that we use to forecast roughly when they are likely to occur. Growth expectations have slowed, both in the US and globally. However, our analysis suggests that even though the US is relatively late in the economic cycle there won’t be a recession this year.
A powerful catalyst for a recession would be interest rates moving into restrictive territory – where debt service costs move to such burdensome levels that they discourage spending and investment.
Despite a tight labour market and rising wage pressure the Federal Reserve has said it is in no hurry to resume raising rates. Elsewhere in the world inflationary pressures are subdued meaning there is no incentive for major central banks to increase interest rates aggressively.
We still expect global growth to slow, so the rest of the year is unlikely to be plain sailing. Let’s make it clear we do believe we are late in the cycle and a bear market will come at some point.
However, historical analysis shows that some of the best years to invest are just ahead of market highs. One of the best years to invest in the past 25 years was 1998, just a year before the FTSE 100 peaked ahead of the infamous dotcom crash and three years before the deep recession starting in 2001.
Looking at the more recent bear market surrounding the financial crisis in 2008, once again, you would need to have been incredibly prescient to make selling out of the market worthwhile. The best year to invest was 2009, when the market bottomed, as you might expect. But it was only marginally better than investing in 2006 and remaining invested, even though this was only a year before the credit crunch began.
It is all but impossible to time the market perfectly, even with the best forecasting skills. But we are constantly monitoring market and economic data, looking to make some judgement calls to deploy money to capitalise on market sentiment. Right now one of our key judgement calls is that it is better to remain invested in equities. If anything, further dips in the market should be seen as buying opportunities to add to quality holdings at better prices.
1. CNBC: The best January in 30 years could mean good things for the stock market in 2019, 31 January 2019.
2. Citywire Funds Insider: The funds investors dumped in ‘annus horriblilis’ for sales, 8 February 2019.
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Past performance is not a guide to future performance.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
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The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.