We're living through exceptional times in equity markets. Global and US equities have rallied around 6% this year, (the best start for S&P 500 price returns since 1987). Global equity volatility over the past year is just 5.6%, one-third its long-term average of 15.6%.
Investors waiting to buy a dip have suffered significant opportunity costs – the S&P 500 has gone 379 days without a 5% drop, a record. Fighting the trend in any asset class has proven expensive: the returns from buying the recent best performers and selling the worst ones, in stocks, bonds, commodities and currencies, have only been this good three times in the last decade, according to Bloomberg analysis.
We don’t expect a near-term reversal of the trend because there is no obvious catalyst. Inflation remains low, geopolitical risk has eased, and growth is robust and widespread. Much of the year's rally can be seen as a logical response to US corporate tax cuts, which we expect will boost US earnings growth to 15% this year. We anticipate a global earnings rise of 8–12%. Investors underexposed to equities will likely continue to lose out, in our view, so we remain overweight them globally.
But investors shouldn’t neglect the exceptional nature of current conditions. At some point, volatility will return to normal, and momentum trends are, by their nature, vulnerable to reversal. Investors who maintain portfolio discipline – keeping well diversified across regions, sectors and asset classes; refraining from taking on excess leverage; and factoring in the realities of historical volatility and drawdown risk – will fare best if bumps in the road arise.
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