People are looking towards the stock market again, but could be repeating their mistakes.
Markets have gone gangbusters over the past few years and investors have finally decided to take the plunge and get back into stocks.
This is according to the latest Schroders UK Financial Adviser Pulse Survey, which showed 49% of advisers reported that their clients, who have been holding cash over the past few years, are now more likely to consider returning to investment markets or have already invested.
It is understandable why investors waited for the market to calm down. In an era of rising rates, many chose to pull their money out of stock market investments and channel it into cash savings accounts and money market funds, which offered decent returns for the first time in more than a decade.
Yet perhaps the question should be why now? On the face of it, it makes logical sense. Markets have held up surprisingly well over the past two years, despite inflation and interest rates rising sharply. Since January 2022, for example, the S&P 500 is up 24.3%, despite losing 8.3% in 2022.
In theory, with interest rates peaking – and likely to come down in the coming months across the world – this should benefit big companies such as the Magnificent Seven tech names, which should have been hit hard by rising rates.
Higher rates, after all, increase the discount rate. Or put more simply, why pay up for a growth stock with high risk in the hopes it can deliver future returns, when you can get more than 5% in a bank account today?
But there is a chance that investors have left it too late. For example, despite being hammered in 2022, the S&P 500 Information Technology sector has rocketed and is now 54.1% higher it was at the start of 2022. Many could have therefore missed the boat.
Yes interest rates are expected to fall, but the market has, in my view, become too myopic on this one data point.
Overlooked factors, such as wars breaking out around the world, elections in hundreds of countries and the perceived end of globalisation through trade tensions – particularly between China and the US – make the situation less straightforward than simply: ‘interest rates will fall so stocks should do well’.
For an example of this, we do not have to look too far back in history. The Schroders report noted 41% of advisers reported that their clients are now bullish compared with only 17% in November 2023, while just 10% are bearish.
This is the strongest balance of sentiment since May 2021 when market optimism surged as economies started to recover from the initial impact of the pandemic and first lockdown.
Here investors were singularly focused on the Covid recovery narrative and eschewed fundamental investment principals. They focused on the feel-good story. Yet while those that invested in May 2021 enjoyed some upside early on, they would have then been hit by the falls in 2022.
As mentioned, those that held on for the long-term have been rewarded in the years since, but it is human nature to sell when things are falling. Which is something we can infer from the data, with many clients moving to cash in 2022 as markets were falling.
There are good reasons to invest today but investors looking to get back into markets on the hopes of interest rates falling should remember that it is often something unexpected that derails markets.
Therefore, it is crucial that any money added over the coming months is with the knowledge it will be tucked away for years, and won’t be pulled out at the first signs of trouble.
