What a difference a month makes in financial markets. At the end of October, equity markets had seen a 10% decline from their highs in July. This was a clear reversal in market sentiment from the rally seen into the summer, with many market commentators suggesting that equities could finish this year close to where they started.
We were more bullish. We felt at the time, and wrote about it then, that the market was too pessimistic in the short-term and this offered investors a buying opportunity. While markets were coming down and investors started to become increasingly fearful, the underlying economic and corporate data remained positive. The Q3 US GDP data were very strong and well ahead of expectations, inflation was coming down pretty much everywhere, and it was becoming increasingly clear that the Federal Reserve was probably done with raising interest rates. Corporate results in the most recent earnings season were also better (on average) than expected for US companies across most sectors of the economy.
And we were right to be more bullish. The sentiment back in October was too pessimistic. Since then, we have seen a +11% rally in stocks (using S&P 500 as a proxy) and we are not far off testing new all-time highs for some stock indexes. Our core global equity fund (Global Trends Managed) is now hitting new highs for the year and in USD terms is up +23% YTD.
The speed with which markets can turn, especially when sentiment is overly bearish, is a lesson for investors. An expensive lesson for investors who are underinvested, or who have been selling out of high-quality risk assets in response to short-term weakness in markets. It is common for investors to respond to widespread market fear, to a short-term move down in markets, with the decision to sell-out of equity investments to ‘reduce risk’. The problem is that this creates a new risk. A risk of missing out on the upside of a recovery in markets to reflect the strong fundamentals.
A considerable proportion of long-term returns for investors come from remaining invested through short-term periods of weakness followed by strong recoveries in price. Markets are and have forever been characterised by this behaviour in prices. Sentiment lurches towards being more bearish, because of a war in the middle east, or a pandemic, or whatever the latest scare story is. Prices drop in response. Markets quickly realise the underlying picture of the economy is actually OK, prices quickly recover and hit new highs.
Investors must be careful to not get this wrong and read too much into each new short-term move down in markets. The +11% move up in markets in the past three weeks proves this, remaining invested is critical for long-term success.
What is more, looking into the year end for 2023, this feels like an equity market that wants to keep going up. And equity markets going up will keep going until something stops them. For now, it doesn’t look like anything is stopping this rally.
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