Financial markets are cyclical, each stage of the market cycle - of which there are four - has its own distinctive features. During any one phase of the cycle, a particular asset class may start to overtake others as market forces change to benefit some business models over others. For instance, during a market downswing, industries producing durable goods such as toothpaste tend to take the lead, demand for essentials doesn’t change during market downtrends.
The four major stages of a market cycle are accumulation, uptrend, distribution and downtrend. Market cycles are not always identifiable until after the phases are concluded. Recognising them, however, can be an important way of seeking to raise investment returns, with accumulation being the best time to buy and the final stage, the downtrend or markup stage, being the best time to buy.
Market cycles are often discussed alongside Bear Markets, Recovery, and Bull Markets. A bear market is when the price of an investment falls over time, whilst a bull market sees asset prices rise. "Bulls" are investors who buy assets because they believe the market will rise. "Bears" sell because they believe the market will drop over time. The bull market begins with the accumulation phase, whilst the bear market begins with the distribution phase.
Find the latest research on market trends in industries around the world, from growth patterns to asset class performance.
Our Asset Allocation team includes dedicated and experienced strategists whose focus is to forecast the outlook and the stage of the market cycle for their specialist asset class, including bonds and equities. They work alongside our in-house economics team who focus on assessing the underlying macroeconomic environment. Our economists then work with our team of strategists and portfolio managers to translate their views into what this means at a portfolio level.
“You only find out who is swimming naked when the tide goes out” (Warren Buffett, 2001). In bull markets, market risk is often the most important driver of performance. However, we should pay attention to bottom-up investors in both equity and credit markets as they can add value in spotting turning points and identifying areas where investors may find themselves overexposed.
On some indicators equities look expensive – the CAPE ratio is the highest since the dot.com boom. But with interest rates at multi-decade lows, shouldn't equity earnings yields be low too? Rising interest rates pose a threat to valuations, but models suggest this could be offset as long as recession fears remain low.
2017 marks a number of financial anniversaries; the 1987 stockmarket crash, the 1997 Asian financial crisis, and the beginning of the global financial crisis. As we haven’t really experienced an extreme boom or crisis recently, looking back will be a refresher as to what could occur, but also provide a wider perspective on investment returns. Nothing is as evocative of the past as its music, so we accompany our look back with a soundtrack of those hits we think have withstood the test of time, and those hits that we would rather forget.
Leicester city’s rise and fall over the past year mirrors that of financial risk premiums. Fundamentals are probably average but performance can oscillate wildly. The Fed wants to see monetary conditions tighten: this can come through a stronger dollar, higher risk-free rates or increased risk premiums.
Our incoming CIO, Anton Eser, talked on Bloomberg about the structural imbalances in the world. In my view, this is a ‘must see' clip for every investor. While we agree that these imbalances exist, here are some additional factors to keep in mind.