Embracing stock markets’ all-time highs
Narrow leadership often marks the peak of a bull market, but this isn’t the situation currently
STOCK markets’ ascent to new peaks ignites a potent mix of excitement and caution among investors. In the last few months, there has been a remarkable surge across financial markets worldwide, with even stalwart markets like Japan breaking free from the shackles of a three-decade-long bear market. Assets such as gold and Bitcoin have also hit new all-time highs.
Amid these gains, there have been two notable exceptions – Hong Kong and mainland China – which are mired in a multi-year bear market from the fallout of the debt bubble linked to real estate. Index values are back at prices last seen in 2006.
When faced with these choices, many investors see more opportunity in allocating to value markets like China, versus the frothy valuations seen in the US. Much has been written about the narrowness of the bull market in US equities, how all the gains are attributed to the Magnificent Seven, and how this is a negative signal. A closer examination reveals a more nuanced reality.
Narrow leadership often marks the peak of a bull market – but only when the rest of the stocks in the index are acting weak and the index is propped up solely by a handful of large-cap stocks. This is not the situation we have currently, where nearly 70 per cent of stocks in developed markets have been trending upwards.
It is normal for a market-capitalisation weighted index to be led by the largest companies. As long as the rest of the market follows, it is not an indication of a market peak.
The rally has been broadening widely over the last three months, suggesting a healthy bull market. Frothy valuations on their own are not a catalyst for downside; they need a combination of liquidity and leverage before risks become elevated. With more than US$8 trillion now in money market funds, leverage is not yet at worrying levels. Nevertheless, amid the euphoria of all-time highs, investors grapple with a familiar sense of unease. The fear of an imminent downturn lurks in the shadows. Yet, historical precedents offer a reassuring perspective: New highs are often indicative of sustained bullish momentum.
Following record peaks, equity indices typically continue their ascent, delivering double-digit annual returns for an average of two years before reaching a cyclical peak. This observation challenges the notion that all-time highs portend impending market reversals.
The journey through the peaks and valleys of an investor’s journey demands a blend of resilience, patience and foresight. Rather than succumbing to the temptation of timing the market by selling at the zenith and waiting for a future dip to re-enter, investors should adopt a steadfast approach to their investment strategies. All-time highs should not be viewed as a signal to retreat, but instead as affirmation of the market’s resilience and potential for growth.
The significance of all-time highs extends beyond mere market performance. It serves as a reflection of broader economic trends and technological innovation. For instance, the recent surge in technology stocks underscores the transformative impact of digitisation on various industries, from e-commerce and cloud computing to artificial intelligence and biotechnology. As investors, it’s crucial to remain attuned to these underlying drivers and their implications for long-term investment strategies.
Despite periodic bouts of volatility and uncertainty, financial markets have demonstrated a remarkable ability to rebound and reach new heights over time. This resilience is a testament to the underlying strength of the global economy and the ingenuity of market participants in adapting to evolving conditions.
All-time highs provide an opportune moment for reflection and strategic planning. Investors can use this period of optimism to reassess their financial goals, risk tolerance, and investment strategies. By aligning their portfolios with their long-term objectives and maintaining a disciplined approach to investing, they can navigate market cycles with confidence.
The writer is head of investments for Singapore at AlTi Tiedemann Global. The views are solely the author’s, and do not reflect the views or positions of AlTi Tiedemann Global or its subsidiaries. This content should not be considered as financial advice.
