This bull market gained steam in Q4, with global equities climbing 4.6% in the quarter to bring full-year returns to 11.8%.1 We expect markets to stay strong in 2018 and deliver equity investors a great year.
We believe this bull market has entered its final third, a time when outsized annual returns are common. Huge years like 1999, 1998, 1997, 1989 and 1986 all occurred as bull markets neared their peaks.2 As bulls age, investors generally become more optimistic. Equity markets climb the wall of worry and optimism gradually replaces fear. Worries about the next downturn give way to fear of missing potential gains. Investors see less risk and more opportunity, eventually morphing into euphoria. The more these emotions percolate, the higher investors bid shares.
We haven’t yet seen the huge returns typical of a bull’s final third. UK investors enjoyed a stellar 2016, but that was largely a function of the weak pound. That reversed in 2017, with the stronger pound dampening UK investors’ returns on foreign shares. Returns in dollars were better, boosting Americans’ animal spirits—yet even then, dollar-based returns were near global equities’ average 18% annualised dollar-based return in bull markets since 1926. 3That Americans see a modestly above-average bull market year in 2017 as robust speaks to how much investors underestimate equities’ potential.
Though we don’t expect a bear market (long, fundamentally driven decline exceeding -20%) this year, we anticipate volatility—up and down. A correction (sharp, sudden—but fast-passing and soon over—drop of roughly -10% to -20%) at some point this year wouldn’t surprise. Corrections are impossible to predict and time consistently, so we don’t try. Investors who fall into the trap of trying to time and navigate such sentiment-driven swings often do themselves much more harm than good. Better, in our view, to not try to time such factors and instead invest in a sensible strategy likely to meet your investment goals and focus on the longer term.
One reason we don’t think a bear lurks this year: Whilst sentiment outside continental Europe warmed in 2017, it isn’t euphoric. For example, in America, professional forecasters again project single-digit US equity returns. Markets usually don’t do what the crowd expects. That doesn’t mean they automatically do the opposite—they could be more or less positive than widely expected, too. Whilst a down year would surprise, this seems unlikely—fundamentals are strong, and extant risks appear too small or unlikely to wallop markets. With the global economy on an upswing, world trade humming, eurozone yield curves steeper and earnings growing nicely, surprisingly strong returns seem much more probable.
Because the last bull market was cut short by a US accounting rule change and the government’s haphazard crisis response, investors haven’t seen rational optimism since the late 1990s. As a result, many have trouble discerning optimism from genuine euphoria. For a windowpane into future euphoria equity markets may encounter, see bitcoin. Not only is it a sign investors can still muster animal spirits (versus being permanently scarred by the financial crisis), it shows what to watch for as sentiment improves. Newfangled technologies and new paradigms often emerge near the end of bull markets, driving normally rational people to abandon reason and make speculative bets. What matters is the moment when such irrational exuberance spills into broader markets. We are watching closely for this but don’t believe it is here yet.
We expect many of 2017’s largest country- and sector-level trends to persist this year. Geographically speaking, eurozone equities led in 2017, despite a Q4 pause that has all the hallmarks of a brief countertrend. In our view, even after a strong 2017, positive surprise potential is greater in the eurozone than America and elsewhere. Currency factors also helped depress European sentiment, as global equities rose just 7.5% in euros, the smallest year since 2011.4 Whilst larger returns stirred Americans’ animal spirits and a late-2017 FTSE run boosted Brits’ cheer, European investors still feel quite blah. Add in lingering fears of weak economies, ECB policy and regional politics, and expectations for eurozone shares remain low. There is ample room for continued economic growth and strong earnings to bring surprise sunshine—a key reason we expect eurozone shares to lead again in 2018.
On a sector basis, Technology shares seem well positioned to continue leading world markets. Robust IT-related business investment, mobile adoption and cloud computing are powering demand for hardware, components and software. However, Energy—2017’s worst sector—likely continues struggling as enduring supply gluts pressure oil prices.
As for fixed interest and interest rates, we expect long-term gilt yields will likely wiggle up and down but ultimately remain benign in 2018. Because major developed-world long rates are highly correlated, global factors likely influence gilt yields more than local. Most anticipate rising rates worldwide, believing long rates are overdue to react to the US Federal Reserve’s (Fed) three rate hikes in 2017, in turn pulling global yields higher. However, long rates don’t typically move in tandem with short rates. Whilst central banks control short-term interest rates, long-term rates are market-driven—a function of real interest rates plus some inflation premium. Fed rate hikes amid low inflation are anti-inflationary, so 2017’s hikes flattened America’s yield curve, weighing on lending and money supply growth. 10-year gilt yields similarly fell after the BoE raised the Bank Rate in early November and closed 2017 down from 2016, a sign investors expect higher inflation to be fleeting and aren’t demanding much of a premium. Should the Fed and BoE hike rates further in 2018, we expect similar. Moreover, global monetary policy shifts have been glacial, giving markets ample time to digest moves.
Whilst we are bullish and expect broad-based positivity for global equities this year, we are aware this bull market will someday end and always look for indications the next bear is approaching. We never expect—nor try—to nail a market peak. Doing so would mean risking missed upside if we are wrong. Crucially, we don’t believe investors who need equity-like growth for some or all of their assets need to avoid bears (in part or in full) to progress towards their longer-term goals. But we believe it is possible to identify a bear market early enough to avoid a chunk of downside, and successfully doing so can be beneficial.
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Investing in equity markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. The value of your investments may fluctuate. International currency fluctuations may result in a higher or lower investment return. Past performance is never a guarantee of future returns.
This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited Headquarters: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom. Fisher Investments Europe Limited’s parent company, Fisher Asset Management, LLC, trading under the name Fisher Investments, is established in the USA and regulated by the US Securities and Exchange Commission. Investment management services are provided by Fisher Investments.
1 Source: FactSet, as of 3/1/2018. MSCI World Index return with net dividends, 31/12/2016 – 31/12/2017.
2 Source: FactSet, as of 3/1/2018. Based on MSCI World Index calendar-year returns with net dividends.
3 Source: Global Financial Data, Inc. and FactSet, as of 28/12/2017. Annualised price returns in USD for bull markets from 1926 to 2007. The current is omitted as it is incomplete. GFD World Index used for bull markets from 1926 – 1970; MSCI World Index from 1970 – 2007. The MSCI World Index’s 2017 price return in USD was 20.1%. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.
4 Source: FactSet, as of 3/1/2018. MSCI World Index return with net dividends in EUR, 31/12/2016 – 31/12/2017.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.