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Are soaring stock markets a good sign?
The S&P index in the US is up nearly 270% since March 2009, making the current bull market the second strongest since World War 2, according to analysis by LPL Research.
Stock markets in other parts of the world are also thriving. The DAX Xetra in Germany is up by more than 200% since 1 March 2009, according to SharePad.
Over the same time period, India’s BSE 100 has risen by 160%; Hong Kong’s Hang Seng is 115% ahead; and The Russian Trading System index is up 107%. In the UK, the FTSE 100 has appreciated by more than 90% over those eight and a half years.
Against that positive backdrop, some professional investors are increasingly worried about the sustainability of the market, saying we are long overdue a market pullback.
The bull run is central to this week’s edition of Shares. While we aren’t calling the top of the market, we are highlighting the importance of re-evaluating your portfolio so as to be fully prepared once the market correction does happen.
Don't sit back and relax
Markets don’t stay in an upwards direction forever. History tells us they move up and down.
There are plenty of reasons to suggest the market could eventually run out of steam. Monetary stimulus is being withdrawn (albeit slowly); consumer debt is high in the UK and US; and equity valuations are high.
Monetary stimulus boosted asset valuations so taking it away might lead to lower asset values including stocks and shares. High levels of debt raise the risk of economic weakness if consumers cannot repay their borrowings; which in turn dampens prospects for a wide range of businesses.
On the third point, high equity values imply lower returns in the future. Only savvy investors will emerge victorious. They are the ones who sell their highly rates stocks to others who may not realise they are over-paying. The savvy investor will then sit and wait for the market to become cheaper.
Your current focus should be on protecting the wealth you’ve accumulated during the bull run. However, it is important to stress this does NOT involve selling ALL your investments.
It is impossible to accurately time the market. Some of the best returns have typically come in the late stages of a bull market. You not only need to stay invested during this period; you also need to maintain equity exposure during bad times as you won’t want to miss the recovery which can be rapid and rewarding.
Regular investing during market downturns allows you to buy assets at a cheaper price. We’d focus on companies with strong levels of free cash flow and high return on the money they reinvest back in their business.
Build up a cash pile
Now might be a good time to trim profits in the highest valued stocks in your portfolio. You would crystallise some of your gains and generate cash to go bargain hunting should markets start to pull back in the near future.
In 20 July issue of Shares we warned some fund managers had started to get out of many high-growth, high-value stocks – and it seems the wider market has now begun to do the same. Just look at share price weakness among the likes of Fevertree Drinks (FEVR:AIM), Purplebricks (PURP:AIM) and Keywords Studios (KWS:AIM) in recent weeks.