The US market has broken into record territory over the last week on the news of trade deals coming to a close and Brexit coming off the cliff edge. The Fed has cut interest rates another 0.25% yesterday as insurance that the recovery will remain intact. All of this is great news for the markets and brings some justification to the recent rally. If there is so much good news in the markets then why are there still signs of money on the side lines, bearish sentiment across news and institutional investors? This comes down to horizon and investment goals.
As a participant in the current market (which almost everyone is in some way) events are justifying why you should remain in the markets. In fact there are very few times that you should be exiting the markets all together, and really none in the past decade that we have seem. What the events should tell investors is more along the lines of where to allocate more capital coming into the market and how rebalancing should be applied. Longer term investors need to be more concerned with making sure they have the right asset mix and to keep their money working at generating a certain amount of yield longer term to reap the benefits of compounding interest. This means that assessments need to be made as to where growth will be in the future while ensuring that current holdings are maintaining the same level of growth.
This leads to the US markets rallying despite the global slowdown. For many European and Asian investors the introduction of more stimulus is giving them cash in place of their negative yielding bonds. While some of this money will move into local stocks and bonds, investors are also looking for growth and a hedge from their currency (which will likely depreciate due to more asset purchases) for more return. This makes the US an attractive location to put money at the time, higher rates (still) than other developed countries, better economic performance, and rising stocks. But these high prices will have another effect on the US markets that could cause investors to look elsewhere, lower longer term returns. Immediate asset price appreciation from foreign investors getting an inflow of cash will lower the expected returns (in yield and earnings growth) on US assets. So long as that number remains higher than other countries we will see money continue into the markets. What many investors are doing now is sitting in cash waiting to allocate money at a cheaper price. This is a sign that other prospects are not available and the US markets returns are not as acceptable to some investors at current levels.
What should investors look for? Stay the course in asset allocation, rebalancing as needed. In terms of cash and future growth, there are assets that are out of favor near term that should be looked into for their 3 to 5 year horizons. Recent news like China announcing a longer term trade deal with the US being unlikely, or European paralysis in terms of economic unity will play important roles in these longer term projections. Shorter term news, such as unrest in Latin America, could prove to be depressing asset prices in the area, allowing for higher than average returns in the longer term.