Expect market volatility as value lies outside US, writes
The US stock market rally has lasted from March 2009 until the summer of this year, the longest bull market in history.
Many thought it would end in 2013 but that was a 30% up year. Analysts have been calling an end to this rally for many years now and each so-called “big story” was to be the catalyst that for that.
But the correction never came. Yes we had some moments, the slump in oil prices in early 2015 caused a 10% correction as did a blip in wage inflation in February this year. But the market recovered from those and continued on an upward path.
President Donald Trump being elected, North Korea, China trade wars, Russia invading Ukraine, immigration issues and Brexit all failed to reverse the uptrend until now.
The latest stories to be put forward as reasons are the Italian deficit issues and Saudi Arabia. If trade wars between the US and China cannot derail the stock market for most of this year surely these stories are not significant enough to do so? And they’re not. There is something else at play.
Imagine you are a money manager in the US. You have had your clients in the stock market and year after year they are winning, big margins in most cases.
The S&P 500 is up 335% since the start of the rally in 2009. You have been playing golf and the client has been winning and everyone is happy. The temptation to cash the client in and take profit did not exist. Interest rates were very low so there is no return there and nobody else is doing it anyway.
That has all changed. US rates are now 3%. Suddenly there is a decision to be made. If the stock markets were to fall the client would be better off in cash.
Maybe the rally is over and these very overvalued stocks have little more to give for the next number of years. What If I leave my client in stocks but the bigger players sell, that will cause depreciation in any case. I cannot afford to be complacent anymore - I need to make a decision.
To established money managers their ability to take these decisions is why they earn the big money but to so-called newbies, who are only in the market a decade or so, have never seen a bear market, hence the spike in volatility.
You may think this only matters to US investors. Open your investment strategy or your pension and it is likely you have 50% plus exposure to US equities. That applies to investors all over the world.
Templated, off the shelf product, defaults into this sector for no other reason that they are the biggest. Not the best value, the biggest. That is fine when the market is in a bull run but a dilemma when it is overvalued and due a correction, like now.
Add to that an overvalued US dollar and exposure to this sector could cost you dear in the medium term.
Legendary investor Warren Buffett’s ‘Price Is What You Pay, Value Is What You Get’ quote, has never been so true. European equities have not been this cheap compared to their US counterparties in 30 years.
Value investing is not being rewarded and is always difficult to time.
European equities, precious metals and emerging markets are all really cheap but not appreciating yet.
The market is not differentiating between value and overvalued, that is because investing in the US has become a habit. It will take some time or a sharp shock to break it. But we know in the medium to long run value investing, buying quality assets cheap, is the winning strategy.
Expect this volatility to continue. I do not see a total meltdown only a correction. From here I see value outside the US markets so for individuals it is time to re-balance.
- Peter Brown is founder of Baggot Investment Partners (Baggot.ie)