After a torrid time for markets at the back-end of 2018, investors were left with little cause for hope about what 2019 might bring. However, investors who stayed invested would have participated in a particularly strong rally during the first six months of the year.
Notwithstanding the reigniting of the US-China trade dispute by president Donald Trump, markets have surged on the decision by the Federal Reserve to halt the rate-hiking cycle that had damaged confidence so badly last year.
There has been further cause for optimism in markets as the central bank has signalled that it will act to support the flagging economy by cutting interest rates.
As such all major markets recorded gains during the first half of the year as the below chart shows.
Performance of indices in H1 2019
Source: FE Analytics
“The US was far and away the biggest winner of the period with technology stocks leading the way,” said GDIM investment manager Tom Sparke. “Emerging markets were a mixed bag, with markets like Russia adding significant value but Brazil struggling for most of the time before a rally in the last few months.
“The secular growth in all things technology is proliferating into many other markets and is not showing signs of stopping just yet.
“In a period where most assets did well, healthcare struggled, possibly because of the US election cycle re-starting and the risks this could pose to this sector.”
However, Sparke believes prudence is a virtue in this market.
“While the outlook for most risk assets looks promising at this mid-point in the year I think that caution is appropriate due to where we are in the cycle as well as how far assets have come already in 2019.”
If there was one lesson that Hargreaves Lansdown senior analyst Laith Khalaf took from the first half of the year, it was the changeability of markets.
“Markets can turn without warning,” he explained. “Investors that hesitated during the mini-panic at the end of 2018 would have missed the best first half of the year this century. Of course, things could turn again, but history shows your best bet is usually to stay the course.”
Indeed, it’s something that investors should also be aware of as we move into the second half, Khalaf said.
He added: “Calling short term market movements is difficult – and they’re usually just noise. Investors should take a long-term view and not try to time the market.”
Andrew Merricks (pictured), fund strategy consultant at Skerritts Consultants, said investors should be mindful of the lessons of history and that the market doesn’t tend to peak until at least six months before the next recession.
“As we didn’t see any prospect of a recession hitting the US this year, it said to us that the market had a new peak to achieve and so to remain on the front foot in terms of asset allocation,” he said.
“The current scenario is very reminiscent of 1999, where markets rallied strongly after a 20 per cent correction, driven by a loose Fed and an insatiable appetite for technology stocks,” Merricks added.
“Some of us remember just how painful it was when it all ended in 2000 with the tech sector down 85 per cent, but the very best returns were achieved just before the crash.
“In the absence of a recession suddenly appearing in the US, I expect the markets to climb the wall of worry, with the odd bump, but aim to be nowhere near fully invested when the tipping point inevitably arrives. I don’t think that this will happen this year.”
Tilney Investment Management Services managing director Jason Hollands said it had been a “fantastic” start to the year for markets.
“Coming on the back for a turbulent fourth quarter in 2018 and significant outflows of funds from retail investors, this is a timely reminder that when the herd is panic selling on short-term news or volatility, this is usually a great opportunity to invest if you have the courage to do so,” he said.
He added: “The other lesson investors can learn from the first six months of 2019 is not to get too distracted by the white noise of politics and geopolitical events such as trade wars and Brexit, but instead to ‘follow the money’ by which I mean the course of central bank policy.
“The shift in stance by the Fed, away from a hiking cycle towards the prospect of interest rate cuts, and the dovish tone from other central banks, has really been the trigger for the rally in asset prices.”
Hollands said that one of the most notable patterns in markets is the “incredibly wide” dispersion between returns of growth stocks – which he said had become expensive on “practically every metric” – and those of value stocks.
“Investors have notably been piling into businesses that are perceived to have low volatility in their earnings, such as consumer staple businesses, and avoiding more cyclical companies,” he said.
“This weird combination of soaring markets but allocation into businesses that are perceived to have very predictable earnings, is also replicated in the widening valuation gap between developed markets and emerging markets.”
Performance of style indices during H1 2019
Source: FE Analytics
“After such strong returns in the first half, markets could well be trapped in a trading range for a bit,” said the Tilney managing director.
“Growth is slowing across many regions and so from here, choosing the right companies that can demonstrate earnings growth to support their valuations is key and I think it is important to be much more sensitive to the valuations being paid for businesses at such a late stage in the economic cycle.
“Benjamin Graham, the pioneer of value investing, once said ‘in the short term the market is a voting machine, in the long term it is a weighing machine’ by which he meant that short-term popularity will be eclipsed in the long run by fundamental factors, like buying shares at attractive prices.”
He added: “Through this long, liquidity-driven bull market, fundamental factors like valuations haven’t really mattered to investors who have chased stocks with momentum, but as the growth cycle matures, this could well change.”