The debate as to whether we are coming to an end of the long running bull market is raging. The US economic improvement has run for longer than the average post war upturn.
After 18 months of ever improving data from around the world, including the UK, many are forecasting it is inevitable that this continuous growth cannot continue, that growth will decline, and we will witness some form of asset value correction. The alternative to a correction is that we endure a period of sideways movement producing little growth.
The National Institute of Economic and Social Research (NIESR) have suggested that markets are vulnerable to a range of surprises from changes in sentiment to policy failure. One example would be the excessive rise in interest rates in the USA causing an economic slowdown. Other concerns were the overtightening of monetary policy by the ECB or a crunch in China’s credit markets which could cause anxieties to spread and become a catalyst for a correction.
However, there are many reasons to expect the current positive trends to continue. Despite historically low unemployment, wage inflation has not yet risen to any meaningful levels. Economic outlook remains below its potential and is still rising. Often ahead of a recession, output is above its potential and falling.
The movement of bond yields is often a good indication of future prospects. The yield curve is a line tracing yields across differing maturities. If this line is falling away, it suggests poor growth. The yield curve has flattened recently as traders bought long-dated securities and sold short-dated securities on the belief that the Federal Reserve would raise rates more than investors expected. While the yield may have flattened recently, it still remains positive.
The prudent actions of central banks particularly the Federal Reserve is paramount. The pace of rate rise will be vital to future fortune as an over reactive Fed may damage the ongoing recovery. On current evidence however, the Feds heavily reported actions are measured, supportive and give good reason to expect continuity in economic conditions.
Positive company earnings reports and growth figures reinforce the picture of steady, ongoing global recovery. Although the withdrawal of monetary stimulus is likely to be significant and carefully executed it is another indication that the global economy is strong. Lingering wage weakness show there is still more growth capacity.
We are inevitably moving closer to the end of this current cycle and so are increasingly thinking of how to add protection to downside risk while still accessing growth opportunities. We have held an overweight cash positions but have introduced into all of our portfolios some Absolute Return Funds that invest in short and long equity positions that can provide growth and protection.