Markets have gone nowhere for the past 12 months against a tough backdrop. Can investors hope for more in the short-term?
- Markets have absorbed a raft of interest rate cuts, the threat of recession, weaker earnings and a near-miss banking crisis
- This is good news for those who fear a new bear market, but discouraging for those who prefer a bull market
- Are there reasons to hope that financial markets might break out of their trading range?
As the clocks go forward and green shoots start to emerge, it appears that Spring has tentatively started to arrive. Markets have been largely immune to any sunny mood this may bring, and it is notable that the MSCI World is almost exactly at the same level as it was in Spring last year.
Stagnation is not bad thing – and certainly better than a slump. After all, markets have absorbed a raft of interest rate cuts, the threat of recession, weaker earnings and a near-miss banking crisis. That they have gone nowhere is, in reality, somewhat surprising and probably as good as investors could hope for.
This is particularly true over the last few weeks, while the uncertainty of the banking sector has loomed. Markets have rallied quickly from their lows, suggesting investors are looking for an excuse to buy, rather than an excuse to sell. Had valuations been higher, or there been broader fears about the global economy, selling pressure might have been stronger. As it is, the banking sector has taken a hit, but the rest of the market has largely recovered.
This is all good news for those who fear a new bear market, but not quite such good news for those who would rather markets were doing a little bit more. Going nowhere with lots of volatility isn’t everyone’s idea of a good long-term investment strategy.
Is this the new reality? Or are there reasons to hope that financial markets might break out of the trading range that has prevailed over the past 12 months? It is possible that if inflation appears to be beaten and interest rate expectations took a dive that markets may show greater exuberance, but this still appears some way off.
Equally, there are markets where sentiment has been very poor and where a small shift could spark a rally. Areas such as UK small and mid cap companies might fall into that category. Emerging markets continue to look extremely cheap relative to developed markets and eventually investors might start to recognise the value there.
However, for most markets, it seems more likely that multiples will remain roughly at their current levels and any share price strength will come from earnings improvements. Dividends may also become notably more important. In short, it is going to be dull. The market is unlikely to do the work, so investors will have to do it themselves.
