People are looking at the stock market again, but they could be repeating their mistakes.
The markets have soared in recent 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 that 49% of advisers reported that their clients, who have held cash for the past few years, are now more likely to consider returning to the markets. investment or have already invested.
Understandably, investors waited for the market to calm down. In an era of rising rates, many chose to withdraw their money from stock market investments and funnel it into cash savings accounts and money market funds, which offered decent returns for the first time in more than a decade.
However, perhaps the question should be why now? At first glance, it makes logical sense. Markets have held up surprisingly well over the past two years, even though inflation and interest rates have risen 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 falling in the coming months around the world), this should benefit large companies like the Magnificent Seven tech companies, which should have been hit hard by the rise in interest rates. the cups.
After all, higher rates increase the discount rate. Or put more simply, why pay for a high-risk growth stock in the hope that it can generate future returns, when you can earn more than 5% in a bank account today?
But there’s a chance investors left it too late. For example, despite taking a hit in 2022, the S&P 500 information technology sector has soared and is now 54.1% higher than at the beginning of 2022. Therefore, many could have lost the train.
Yes, interest rates are expected to fall, but in my opinion the market has become too myopic on this one piece of information.
Overlooked factors such as the outbreak of wars around the world, elections in hundreds of countries and the perceived end of globalization through trade tensions – particularly between China and the United States – make the situation less straightforward than simply: ‘interest rates will fall, so stocks should do well.’
To see an example of this, we don’t have to go back too far in history. The Schroders report noted that 41% of advisors reported their clients are now bullish compared to just 17% in November 2023, while just 10% are bearish.
This is the strongest balance of sentiment since May 2021, when market optimism increased as economies began to recover from the initial impact of the pandemic and the first lockdown.
In this case, investors were singularly focused on the Covid recovery narrative and avoided fundamental investment principles. They focused on the wellness story. However, while those who invested in May 2021 enjoyed some upside early on, they would have been hit by declines in 2022.
As mentioned, those who held out for the long term have been rewarded in the years since, but it’s human nature to sell when things are going down. Which is something we can infer from the data: many clients moved to cash in 2022 as markets fell.
There are good reasons to invest today, but investors looking to return to the markets in the hope that interest rates will fall should remember that it is often something unexpected that derails markets.
Therefore, it is crucial that any money added in the coming months is done knowing that it will be stored away for years and will not be withdrawn at the first sign of trouble.
