Navigating the investment landscape is no easy feat, especially if you believe in investment myths and half-truths.
Do elections have a major impact on markets? Is the economic backdrop essential for stocks to outperform? Is gold the perfect equity diversifier? Do central bank monetary committees fake their debates?
If your answer to each or any of the above was “yes”, Invesco chief global market strategist Kristina Hooper explains why you could have fallen for a “myth”.
Myth one: Elections have a major impact on markets
Elections can “certainly cause short-term volatility, but tend not to have a significant impact on markets over the longer term”, she explained.
In the US, the S&P 500 has posted positive returns across most administrations since 1929, with few exceptions. All presidencies except Herbert Hoover’s, Richard Nixon’s and the George W. Bush’s have posted annualised stock market gains of nearly 10% or more – although many experienced “significant volatility” along the way.
“For all the focus on elections, historically, it’s been monetary policy that’s mattered far more than who is in charge.”
The performance of the S&P 500 index has been closely correlated to monetary policy cycles, with the end of a Fed tightening cycle producing strong returns typically. In six of the past seven tightening cycles, the index has posted double-digit gains in the one-year period after the last rate hike.
Myth two: An economy has to be in great shape in order for its stock market to perform well
That is “simply not true”, said Hooper. A case in point is the US in 2009, when gross domestic product growth declined 4.3% but the S&P 500 grew 23.5% in price returns and made a total return of 26.5%.
“Economic conditions can be somewhat weak, or even very poor, and stocks can still rise for a variety of reasons, such as monetary policy easing, positive economic surprises or positive earnings surprises,” she said.
Once investors realise this is a myth, new opportunities open up in areas of the stock market where there are “blemishes” and low expectations, because those are the areas that “may have significant upside potential” when there is “some form of positive surprise”.
Today, for example, Hooper is looking at UK equities, where the “blemishes” are near-term nervousness around the autumn Budget and longer-term negative sentiment about the potential of the UK economy. But Hooper sees the potential for positive surprise.
“The Budget may not deliver as high a tax burden as expected, or perhaps the very act of releasing the Budget and removing that uncertainty could be a positive catalyst for stocks,” she said.
“There is also potential for some positive economic surprise. UK retail sales for September were better than expected, even though UK consumer sentiment has been declining recently. In addition, the September inflation reading suggests there is more room to cut this year for the Bank of England, another possible driver of stocks.”
On top of that, valuations are “very attractive” and the average dividend yield “quite robust” at 3.64%.
There is a similar story for eurozone equities, where recent Purchasing Managers’ Index surveys suggest economic weakness, but inflation has fallen significantly, valuations are also relatively low and dividend yields above 3%.
Myth three: Gold and stocks don’t perform well at the same time
Investors who invest in gold thinking that it always performs well in a risk-off environment, should think again.
Historically, gold and stocks have had a low or negative correlation to each other, with a few exceptions, but since Covid, gold’s safe-haven status has started to wane. In fact in recent months, it has had “a very high” positive correlation with stocks.
Last week, gold crossed $2,700 per ounce while stocks also hit record highs, with the S&P 500 Index closing at 5,864.
“It seems investors have a largely risk-on stance in portfolios, but are also hedging risk, especially geopolitical risk, with exposure to gold,” Hooper noted.
Myth four: Central banks know what they will do well in advance of their meetings
There is an urban legend that says that the Federal Reserve’s (Fed’s) debates are all performative and that the committee members knows well in advance what they expect to do at each meeting.
“That is not true,” said Hooper, as “we have seen the Fed in recent years take many twists and turns in reacting to the data.”
For example, in December 2021, the Fed’s predicted that the federal funds rate would be 90 basis points at the end of 2022; however, it was more than 400 basis points.
“That’s because the Fed and other central banks are data-dependent, and the data was not what they expected.”