ClockWise: How long will the good times last?

Global equities are up more than 20% in sterling terms since last October’s low, meeting the formal definition of a bull market. The rally shows few signs of slowing down with the S&P 500 recording gains in 16 out of the last 18 weeks – a run not seen since 1971.

Many regional stock market indices have moved to fresh all-time highs over that time, including the Nikkei 225 which has surpassed Japan’s 1990 bubble peak for the first time in 34 years. With a US soft landing rapidly becoming the base case, it’s fair to ask how much longer will the good times last? A while yet we think, but summer wobbles are to be expected.

We have been positive on equities since late 2022 when everyone was talking about a recession. Our level of conviction has risen over time. We see a positive macroeconomic backdrop with signs of life in industrial new orders suggesting that the global industrial cycle will pick up as inflation and, most likely, central bank rates fall. This is the equity-friendly Recovery phase in the Investment Clock model that guides our asset allocation. Double digits annual stock gains are typical at these times.

It would be quite normal for markets to consolidate over the summer. The old saying to sell in May and go away has some truth to it, probably as economic activity tends to be muted in the northern hemisphere summer. Global stocks have returned an average 13.8% over the calendar years since 1973 in US dollar terms. Amazingly, only 0.5% of this annual return has come between May and October (chart 1). True to form, the current surge in stocks had its origins amid October volatility and it could peter out – or at least pause for breath – in the next couple of months.

Chart 1: Average global stock market return profile: 1973 to 2023

Source: LSEG Datastream. DataStream World Equity Index (Total Return in US dollars) used to show stock total returns over an average calendar year. From 1973 to 2023.

Longer term, the business cycle will hold the key. An early return of inflationary pressures could be the unwanted side effect of a US soft landing. Historically, long bull markets have started in the depths of recession, when high unemployment rates and empty factories set the scene for years of disinflationary recovery and low rates (chart 2). Where we are now, US unemployment is close to a 50-year low and core inflation is stubbornly high. It’s not beyond the realms of possibility that the Federal Reserve is hiking rates again before too long, ushering in a new period of negativity for government bonds and bond-sensitive growth stocks as we saw in 2022. Not a concern for today, however, but a reason to stay active. We are positive but vigilant.

Chart 2: Global stocks vs bonds and the US unemployment rate (inverted right-hand scale)

Source: LSEG Datastream. Bull markets tend to start when unemployment rates are high and end when unemployment rates are low.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.