Hold your ground – now is not the time to sell
Despite warnings that equity markets are up too much, investors should consider holding their ground.
Forecasts this week appear to point to a stuttering recovery in Europe and the US, and 2013 has been a very strong year on equity markets.
But these markets have done very little over the past 13 years and, historically, decades of poor returns are followed by decades of good yields.
Global equity markets are still reasonably priced despite the advances of the past few years and the hard data shows the market is not over-invested.
The S&P 500 is at an all-time high, yet the average recommended equity allocation is still below the level recommended at the nadir of the last bear market. This illustrates that the bull market of the last few years has passed many by. Indeed, suggested equity allocations are still some way off recommended levels at previous market peaks, so it is hard to argue that bullish sentiment has reached anything close to extreme.
In fact, a jump in equity allocations from very low levels after a move to a new high looks quite positive. Further, fears over an economic slowdown are not based on any evidence. In the US, the leading economic indicator index remains very strong and there has been a notable pick-up in leading indicators in Europe.
The global economy is improving and 2014 could well see an acceleration, which will support earnings growth – the principle driver of equity returns. No doubt there will be volatility as supportive monetary policy is withdrawn but this is only likely to happen as a function of an improving economy.
History tells us that after a period of sustained expansion, interest rates increase to curb inflationary pressures and so 'kill' the bull market. But until we get to a point whereby the world is operating close to capacity, there is plenty of scope for growth before interest rates reign in the bull.
With equity market allocations still low, valuations still reasonable and monetary policy likely to remain supportive for some time, now is not the time to sell.
Ian Quigley is director of investment strategy at InvestecWealth & Investment in Dublin