Stockmarkets reaching for new highs
The media tends to focus on bad news rather than good, and investment news is no exception. The media are quick to report market falls, but outside the industry pages and press, gains rarely receive the same prominence. May was a historic month for stockmarkets – US markets reached all-time highs and the FTSE came within a whisker – but I found few investors were aware of it, even though after recent years this was something to be celebrated.
The two major US stock-market indices, the S&P 500 and Dow Jones Industrial Average, closed at all-time highs during May. They both also breached psychological barriers; 1600 in the case of the S&P and 15,000 for the Dow.
The technology-heavy Nasdaq closed at its highest level since October 2000.
Markets have been slowly improving all year. The rally leading to the highs was a response to a better than expected jobs report at the start of the month. It was not all good news, for example, factory orders fell 4% in March, more than projected, but markets shrugged this off.
While the US economy may not be robust, more green shoots are appearing and it has proved resilient. The strategy of the US Federal Reserve is to maintain low interest rates and inject money into the economy with the intention of stimulating growth. Easier access to funds should encourage businesses to expand; therefore they will hire more staff which leads to increased consumer spending and decreased Government benefit payments.
There was also some positive news out of Europe, sending European shares higher. German manufacturing orders rose 2.2%, when a decline had been expected.
In the UK, the FTSE 100 closed within sight of its all-time high on 21st May, buoyed by mining stocks and positive corporate news from luxury retailer Burberry, among others. It closed at 6,804, its second ever highest finish, after climbing 14% over the first five months of the year.
Its all-time high was 6,951 in late 1999. There is no reason to believe it cannot go on to surpass this. Even with some short-term volatility, it is quite possible this index will also hit a new high and even breach 7,000. As always with stockmarkets though, there are no guarantees, although history has shown that markets usually rebound strongly following crashes.
Recent data has suggested that the UK economy is picking up, and further good news, local or overseas, could push share prices up further. Two thirds of earnings from British companies are generated overseas, so companies are benefiting from the improving US economy and continued growth in developing markets, and are not just reliant on the UK economy.
Low interest rates can also help stockmarkets, and there is still plenty of money sitting in bank accounts earning no real returns that could move into shares.
Looking ahead, one key stumbling block for world markets could be if central banks start to reverse stimulus policies. We have already seen an example of this. On 23rd May US Federal Reserve chairman, Ben Bernanke, said that quantitative easing (where the central bank purchases assets to increase money supply in the economy) could be scaled back if economic momentum was maintained. This unsettled investors, bringing the rally to a halt.
Corrections are not uncommon though in market rallies, as investors take profits or temporarily react to news, but this does not necessarily mean the rally is over.
Markets could go up or down from this point (although over time the trend tends to be up). If you stay out of the market, you may miss the upside and find that share prices are more expensive when you do come to buy, so that you obtain fewer assets for your money than if you invested at lower share prices.
On the other hand you may be concerned about the possibility of market falls. In this case, you could use the “pound cost averaging” approach. This would mean you invest say 25% or 50% now, then some more in a few months, possibly over a few ‘instalments’. This way you would have bought some assets when prices were lower, and avoided the risk of investing all your money just before prices pull back.
Whether markets are rising or falling, there are some key principles investors should adhere to, to reduce risk.
Diversification. No matter how well it is doing, putting all your capital in one asset is risky. Asset class performance is never consistent. The top performing asset one year can be in the bottom two the next. You need to have a balanced and diversified spread of assets in your portfolio to reduce risk. It should be structured around your risk tolerance, investment objectives, circumstances and time horizon.
Take a long term view. It is time in the markets, not trying to time the markets, that achieves the best results. Investing in shares for the short-term is much higher risk. If you do have a medium to longer term time horizon, being out of the market is also risky because you can easily miss the most important rallies. There are many statistical illustrations showing how being out the market for even a few days can be costly.
Re-balance. Around once a year you should review your portfolio to ensure it remains in line with your long-term goals. Over the course of a year it is possible that your portfolio has become unbalanced and riskier than you intend.
Possibly the most important principle is that you should get personalised, professional advice for your specific circumstances. Speak to a firm like Blevins Franks which has been providing wealth management advice to expatriates for decades, and which also looks at the tax planning angle to ensure you maximise your profits.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.