Notwithstanding a few minor wobbles, the current bull market has now been in place for over a decade. Canny savers who invested in the FTSE at the bottom of the market in March 2009 will have more than doubled their money.
Investing at that point (when – if you remember - it looked like the world was about to end) wasn’t an easy choice. It was the kind of environment where people were more inclined to hide their money under the bed. We are now faced with the opposite scenario: markets have been buoyant and the global economy is generally on a sound footing. Are we at the peak? And if so, what should investors do about it?
Certainly, this bull market is rare in its sheer longevity. In August 2018, the S&P 500 had seen 3,453 days without a drop of 20% or more (the technical definition of a bull market), becoming the longest US bull market on record. The FTSE 100 can’t quite boast the same impressive statistics because of a short period between April 2015 and February 2016 when it fell from 7,100 to 5,537, a fall of 22%. If that bit is stripped out, the bull market has lasted over a decade.
However, bull markets don’t tend to just stop for no reason. Olly Russ, manager of the Liontrust European Enhanced Income Fund, says:
“It is sometimes said bull markets don’t die of old age – there is always some other proximate cause.”
This may be, but is not limited to, excessive debt (the financial crisis), irrational exuberance (the technology bubble) or higher interest rates (usually in response to inflation).
As it stands, none of these conditions are in place. Stock markets have risen, but not excessively so, having tended to grind higher rather than burst forth. Interest rates seem more likely to fall rather than rise from here. The Federal Reserve is now forecasting two 0.25% cuts in rates by the end of the year. And inflation is under control. With this in mind, the bull market can probably continue for a little longer.
It may be wise to assume that we are nearer the end of the bull market than the beginning. While it is tempting to put all your money in cash and wait for the storm to pass, missing out on the last few months of a bull market can be painful. Research from RBC group showed investors lose out by, on average, 19% by missing the last six months of a bull market and as much as 29% by missing the last year.
Equally, it is difficult to know when to go back in. The strongest rebound in markets often comes quickly after a market fall. If investors miss out on the rebound, it can dent their long-term returns. Research from Fidelity, looking at the world’s main markets between 1992 and the end of September 2018, showed that an investor who had remained fully invested in the FTSE 100 index throughout that period would have had a total return of 559%.
However, missing just the best five days in the market during that period would have reduced the total return to 343%. And missing the best 30 days would have reduced the return to just 48%.
The message is not to make any sudden moves. Areas that might be thought of as ‘safe havens’ - such as gilts – look quite expensive, and cash rates are low. As such, there can be a big opportunity cost in moving too soon.
That said, it can be a time to re-evaluate. Look at areas that have gone up a lot and may now be expensive. These could be vulnerable in a downturn as investors pay more attention to pricing. Check your investments aren’t skewed to, say, technology, or consumers goods companies. Most platforms will give you a ‘read-through’ on your sector and geographic allocation.
Dividends can become more important at times of weak growth. It can be reassuring to know you are getting an income from your investments even if the capital values are bouncing around. For that, consider areas such as UK or global equity income funds. Interest rates are likely to stay low, so dividends will continue to be valuable.
The recent problems at Woodford Investment Management have shown the importance of being able to sell the holdings in a portfolio. When market conditions become more difficult, this liquidity can dry up. Anthony Rayner, multi-asset fund manager at Miton, says they are investing in areas such as gold and US government bonds:
“These are liquid areas and we would encourage investors to remain liquid in case of more difficult times. You don’t want a lot of illiquid stocks in your portfolio as these will tend to be hit first.”
There are sectors that have typically done well at the end of a bull market, notably energy, financials and consumer staples. However, every market cycle is different and there are no guarantees these areas will do well again.
This bull market may be long in the tooth, but investors may be better advised to ensure they have a balanced portfolio, and then sit tight and ride out the volatility. Trying to predict the start of the downturn is a fool’s errand.
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