BLOG: Remember, markets go up as well as down
But following the volatility of recent years and the ‘lost decade’ for markets, I think many of us are guilty more recently of forgetting that sometimes markets can go up as well as down. We feel uncomfortable that equities are doing well and our focus is on reasons why this trend surely can’t continue.
Investors have been climbing the ‘wall of worry’ since Mario Draghi’s ‘I’ll do what ever it takes’ speech last summer. While global economies have continued to falter, politics have been up in the air and central banks have intervened, stock markets have been steadily rising, surmounting the negatives and showing resilience. Indeed, when Cyprus announced it’s intention to take money from savers a couple of months ago, markets barely blinked and Spanish and Italian bond yields, which you would have expected to widen substantially, remained contained.
The rally in global markets has led to the US stock market reaching a new all-time high and, last week, Twitter feeds even started a count-down on the number of points left until the UK market too hit a new record. But before it could quite make it, weaker than expected manufacturing numbers came out of China, along with the news the US Federal Reserve may start to rein in quantitative easing, and markets took a tumble. Japan, having risen the most in recent months, lost the most (7%) in one day.
Now the headlines are all about an end to a bull market, which seems to have only just been acknowledged as occurring. I’m not convinced that’s the case.
Today’s markets show very few of the characteristics associated with bubbles. Shares are no longer cheap but they are not that expensive either, and trading volumes are low. And the interesting thing about the recent rally is that it has largely been led by defensive stocks, which isn’t usually the case. This is possibly because investors are desperately seeking income and therefore choosing stocks which yield. Equally possible, is that investors’ new found confidence is tempered: they feel comfortable enough to move into equities but too cautious on the global outlook to opt for stocks which require a stronger economic backdrop.
However you look at it, irrational exuberance is certainly a long way off and I believe markets still have some way to go, albeit at a slower pace than we have seen since the start of the year.