Store of value: how long will the cycle last?

Our analysis concludes that we have not yet reached the tipping point of the longest equity bull market in history. Nevertheless, we are mindful that a regime change could be brutal if and when it happens. Investors should think about strategies that prepare us for the seemingly inevitable.

Many of us can hardly remember the last bear market. The stock markets have been on the upswing since March 2009 and are experiencing the longest bull market in history. Since then, major stock indices have made strong gains, supported by the broad economic upturn that the global economy has experienced in recent years. 

Source: Bloomberg Finance L.P., Julius Baer Investment Publishing, based on weekly data from 01.03.2009 to 13.09.2019

The big question now is, how long can this go on? Although there are small black clouds on the stock market horizon, we see no recession in sight for the next 12 months and we expect the friendly environment for equities to continue. Nevertheless, many investors are wondering how long the markets can continue to climb and short-term price drops, often triggered by negative headlines, lead to uncertainty. It is difficult or even impossible to predict how stock markets are interpreting the daily news flow and reacting to trouble spots in the world – be it trade tensions or other geopolitical issues. On the one hand, economic fundamentals remain positive and equities are still attractively valued despite their rise, but on the other hand, volatility in the stock markets can spike daily and might eventually lead to a dramatic downward spiral. 

The end of the current regime is elusive.

How should investors behave in this dilemma? 
In such a situation, it sometimes helps to call to mind what distinguishes professional investors such as Warren Buffett and what differentiated a successful investor from a less successful one in past stock market crises. A famous quote from Warren Buffett is ‘Only when the tide goes out do you discover who’s been swimming naked’ - by which he means that it is only in bad times that one notices who has taken too high a risk and that one should not judge investors according to their success in a bull market. In Warren Buffett’s eyes, a strategy can only be taken seriously if it can withstand difficult times. His message is to be prepared and not be taken by surprise, when the market turns down.

What does this mean?
Based on the afore-mentioned observations, we think that market participants should be aware of three things: 

  • First, we have to look truth in the eye. We are certainly at an advanced stage of the bull market and it is likely that the situation in the equity markets might become more challenging.
  • Second, it has been much easier to generate positive returns in the past than it is today and investors should make themselves familiar with innovative investment solutions.
  • Third, it is time to prepare your portfolio accordingly. 

Weatherproof your portfolio 
Whilst our baseline scenario remains constructive and we are still confident that the environment remains in favour of equities, investors should nevertheless follow a strategy that can hold up relatively well should adverse conditions arise. Arm yourselves for a potential market downturn. 

In the current environment of low to negative interest rates, achieving positive returns is now particularly difficult and alternatives to the stock market are hard to find. Prudent investors wishing to protect their capital to some extent may consider strategies with capital preservation elements or uncorrelated investment solutions. Such instruments may be suitable in the current market environment where a tweet can shake up the markets but an extension of the growth cycle can also not be excluded.

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