Why we are unlikely to see a stock market crash any time soon

Given all that we have been through over the last eighteen months the performance of the stock market has been nothing but stellar. The S&P 500 is up 18.3% year to date including dividends, the Nasdaq 13.9%, Euro Stoxx 14.3%, the DAX 12.6%, and the FTSE 15.3%. The only laggard is Japan at 3.7% and that is due to vaccine roll-out.

So, despite the negative growth and earnings performance across the globe due to lock downs, the markets have seemed to look beyond that to recovery.  Alongside that, interest rates have remained extremely low and accommodative Central banks and Governments fiscal policies, have resulted in an astonishing build up in cash.

Cash reserves get invested somewhere and the flood of money to the markets makes any correction short-lived. Bonds are the traditional safe haven for cash but with yields so low it causes a concentration in other assets.

The policy from Central Banks differs greatly from the banking crisis in 2009 where the policy for recovery was austerity, this time around it is print and spend.

What helps investors sleep at night, despite some very inflated valuations is that they believe the authorities will continue to print and keep interest rates low. And if there is a scare they will print more. So, it is like investing with a back stop.

For seasoned investors this market has been very good but for cautious cash depositors, they risk being left behind. Deposits at zero interest rates are not risk free. Even with inflation at 2% you lose 20% of your buying power in a decade. And with inflation on the rise but the outlook for deposit rates firmly fixed to the floor, the deterioration could get worse.

Ireland has an astonishing level of savings on deposit, 120 billion at the last count. It is no surprise that house prices are rising as property is seen as a safe investment compared to stocks and funds. Cash buyers are a major force and despite the hassle of renting and the possibility of negative equity (unlikely in the foreseeable future) property is an attractive alternative to a bank deposit.

Investing in the market carries a bad rap for many and rightly so. There are some very risky investments people get dragged into without fully understanding the risks involved.

Anything that employs leverage or bank borrowing normally means the investor can lose all or a substantial part of their investment.

I would consider a basket of equites as a very high-risk investment, sure in good years the annual returns can be 15% plus but in a severe correction you can lose over 30%.

What many do not realise is that investment risk can be controlled. It is not difficult for a competent advisor to build a diversified portfolio of assets that has a risk profile in the 2-5% annual volatility range. The basket will contain different assets at different risk profiles, some equity exposure and maybe some gold and silver, some stable bonds and maybe some climate plays such as carbon or uranium. Some of these assets are not correlated so if the market has a correction some will perform and some not. Vice versa when the market is rising. This helps dampen the overall volatility in the portfolio giving the investor a much smoother calmer experience.

Depositors need to get to this stage of investing especially if they are relying on their savings for retirement. Imagine if you retired at 65 with €300,000 in the bank but no pension. Your life expectancy is 30 years, so income is €10,000 a year without any deposit rate. Historically with rates in and around 5% you would be deemed comfortable, but not now.

Straight equity exposure is dangerous, especially US exposure at these valuations.  A balanced portfolio of assets is the key and why not some climate change plays such as carbon credits or uranium.

There are returns out there without having to expose yourself to high risk. Overall, as long as rates stay low and central banks continue to print any correction is very likely to be temporary.


Peter Brown is Managing Director at Baggot Investment Partners.


For a complimentary evaluation of your current pension or investment strategy email us at pbrown@baggot.ie