13th May 2021

Market Update

Equity markets chalked up another positive month in April to build upon the gains made in the first quarter of the year. One might think that this would be a cause for widespread celebration, but it remains difficult for many investors to shake off a sense of impending doom, especially as the “Sell in May” mantra is more widely heard. We have written in the past about the seasonal tendency of equity markets to offer lesser returns in the summer months, and there are plenty of plausible reasons. These range from the timing of company results and dividend payments to the reduction in market liquidity as a result of summer holidays in the northern hemisphere.

Luckily, and with immaculate timing, the ever-resourceful market historians at Deutsche Bank have published work addressing this particular canard. Citing data going back to 1928 for the S&P 500 Index in the United States, they find that, on average, the index experiences its first major reversal of the year in May, but that it has regained those losses by early July. And these being average data, that reversal is around 2%, which is hardly sufficient justification for a wholesale exit from equity portfolios. Indeed, our central view is that investors are best served by “time in” the market, rather than “timing” the market.

Risk assets embracing equities, credit and commodities have experienced a sensational recovery following the losses experienced during the early months of the COVID crisis. It would certainly be unrealistic, unreasonable even, to expect them to continue rising at such a pace. Analysis of previous economic cycles suggests that the “recovery” phase delivers the fastest and steepest gains. Recovery tends to be followed by the “growth” phase, in which corporate earnings catch up with expectations.

The outlook for inflation continues to be at the centre of the investment debate, especially as it will have a strong bearing on future monetary policy. Well anchored inflation expectations have been one of the main foundations of a golden period for financial assets. Allowing expectations to become unmoored would threaten that equilibrium. In the short term, it is widely expected that measures of consumer price inflation will spike up owing to weak comparative readings in 2020. Re-emergence from lockdowns will also boost demand in a world where supply chains remain disrupted and labour shortages are already being reported in, for example, the hospitality trade.

Investors should be most surprised if there are never any shocks at all. Setbacks, when they do arrive, should be no more surprising than the regular arrival of the seasons, the exact timing of which, in these days of climate change, is also increasingly difficult to pin down. Excess returns are generated by taking risk, especially when interest rates and bond yields are as low as they are. The entry fee is exposure to higher volatility of capital values. But, for those with any reasonable investment horizon, “time in” the market will remain crucial to generating acceptable returns.

If you have any questions regarding this update or your own financial planning needs,  please do not hesitate to get in touch on 0117 450 1300.