It’s OK to Chase the Markets
As we approach the end of 2017 many of our clients are asking whether it is wise to chase the rallying stock markets, which have performed and continue to perform exceptionally well. And typically, we would recommend investors be very cautious in chasing such hot markets and that perhaps it would not be wise to chase these markets higher, as historically we have learnt that stocks that are hot today do not invariably remain hot for too much longer. As statisticians would caution a stock’s near-term performance is more likely to resemble its long term past performance as against to its recent performance. Whilst such logic has guided investors well over the years we believe there may well be several good reasons to steer away from such historical wisdom, at least in the medium term, and to remain weighted into the ongoing rally in global stocks.
In support of this view and as we approach the end of 2017 we point out the historical bias towards window dressing, which historically results in a continual inflow of investments into the year’s best performing stocks and investments as fund managers prefer to see the year out holding on to known performing stocks as against taking the risk of searching out the years underperformers. Many fund managers are risk adverse as the year end approaches and prefer to see the year out holding on to the years winning stocks, often regardless of whether or not they see any signs of potential trouble in the short term. And this is true even for those funds that continue to receive net inflows and still need to keep investing late towards the end of the year, they will have a bias towards the year’s best performing stocks and sectors. On this basis we advise our clients to expect to see the stronger performing sectors and stocks performing well and those underperforming for the year to offer little chance of a late rally towards year end.
Secondly, we believe there is a general consensus in the market that interest rates will remain low and that encouraging employment numbers will continue to remain positive thereby helping to further boost corporate earnings and spur growth in the economy. On this basis we expect to see a continuation in the positive outlook for global economies, particularly in Europe as well as the U.S, as well as more generally across a large majority of foreign markets, again with a particularly positive push for emerging market economies.
More generally we see significant structural differences between the performance of global investment markets in recent times as opposed to the driving forces behind comparable periods of growth in the past. Many of us remember, or have read historical accounts, the terrible days leading up to and after the Black Monday crash on Wall Street on the 19th of October 1987, when the Dow Jones Industrial Average fell by over 20%, with the crash preceded by a gradual and substantial ongoing decline in the broader Standard and Poor’s 500 (S&P 500) index. The behavior of markets recently is substantially different to the dark period leading to the 1987 crash, and as we near the end of a rewarding 2017 we see no end in sight to the rally in markets, which continue to add to a near decade of good performance. Of course, we recognize the potential for a market correction, but we don’t expect to see that any time soon and in the meantime, we expect there are further gains to be made whilst awaiting more obvious signs for a reversal.
So for now we recommend staying invested and looking for potential for future gains, remember whilst widely anticipated cuts in the corporate tax rates are most likely factored into the markets, there still exists potential for the eventual passage of legislation to propel the markets higher, as further highs on Wall Street fuel sentiment across global markets.