Markets Resist temptation to time markets despite record highs

Along with concerns over the delta variant and the global supply chain disruption, many investors are questioning whether the global equity rally has run out of steam and if they ‘should get out now and get back in a bit later.’ After all, global equities are near record highs.

But we advise investors to avoid trying to time the market this way—it can be costly. Instead, they should stay invested, diversify exposure, and seek ways to protect against downside risks:

1. Timing the market is tricky and may be costly. 2020 was a lesson in the difficulty of trying to time the market, as the sharpest US bear market in history was followed by the fastest-ever rebound. Likewise, the old adage of ‘sell in May and go away’ was not profitable. Global markets not only didn’t retreat over the summer, they reached record levels. Furthermore, the months following September tend to be positive, as the MSCI World has risen an average of 0.6% in October and 1.1% in November since 1970. For investors, selling during, or in anticipation of a rout, and trying to buy back within a short time can be psychologically difficult, particularly if markets have rallied in the meantime. Even professional fund managers find it challenging to get in and out of the markets profitably.

2. Record highs are no barrier to further gains. The fact that all-time highs are often followed by further gains seems counterintuitive. But record highs aren't the same as market peaks. Our analysis shows that since the 1960s, the S&P 500 rose an average of 11.7% in the following 12 months after reaching a fresh high. As for the odds of suffering drawdowns after buying at record highs, based on data since 1945, investors would not have suffered any losses 34% of the time, while in 59% of cases, they would have lost no more than 5%. Only in 15% of instances would investors have suffered a “bear market” drawdown of more than 20%.

So, instead of trying to time the market, we think investors should stay invested in cyclical sectors and value laggards that will benefit from the global reopening, such as financials and energy. We believe the global economic recovery is on track as the Federal Reserve will unwind bond purchases very gradually while rising vaccination rates will pave the way for governments to push ahead with reopening. Investors can also consider diversifying across regions and themes with structural trends like sustainability and smart mobility, or defensive elements such as cybersecurity and healthcare. They may also consider ways to protect their portfolios against volatility and downside risks.

Main contributors - Mark Haefele, Patricia Lui, Vincent Heaney, Kiran Ganesh, Justin Waring, Jon Gordon

Content is a product of the Chief Investment Office (CIO).

Original report - Resist temptation to time markets despite record highs, 14 September 2021.