Investors should not be concerned of a recession, at least for the next six months, and should stay invested with a skew to growth, according to Skerritts’ Andy Merricks. 
This is despite the market correction seen at the start of the year, with the head of investments noting that 2018 feels much like 1998 – when the bull market was far from over.
While geopolitical issues surrounding US president Donald Trump were mislabelled as the cause for the latest stock market fall, Merricks (pictured) suggested this was not the case.
“In the same way as a strong wind blows the leaves off the tree in autumn, it is not the wind that is the cause for the leaves to fall – otherwise the tree would be bare in summer – it is the catalyst,” he said.
“The cause is that the leaves have reached a fragile state and are ready to fall because of their natural cycle.”
As such, trade skirmishes, Syria, Twitter, Amazon and other issues relating to Trump were catalysts for the market correction – with the MSCI AC World down 1.66 per cent year-to-date – not causes.
Performance of index over YTD
Source: FE Analytics
“In our opinion, markets had reached a cyclical high throughout the end of 2017 and beginning of 2018 and were ripe for a strong wind to allow them to fall – in this case a wind emanating from Washington DC and blowing through China and the Middle East,” Merricks said.
However, while this caused a correction he does not believe it will lead to a full-scale recession in the coming months.
He noted: “We like to keep things simple. Historically, markets peak six months before a recession.”
“So to answer the eternal questions ‘but are we entering a bear market’ and ‘was that as good as it gets’, you need to answer the simple question ‘are we at least six months from a recession?’.
“Absent a major economic shock, we can’t see where a recession is coming from in the next six months (we’re talking about the US in this instance – the UK may possibly be a different case while Brexit rumbles on).”
Therefore, if a recession is not likely within the next six months, yet markets peak six months before a recession, the rationale is that markets have not peaked yet.
“And if they haven’t peaked, they’ve got another peak to find in the meantime. Conclusion? Stay invested,” he said.
Overall, Merricks said that the current climate feels similar to that of 1998, as there had been a prolonged bull markets throughout the 1990s much like the one enjoyed over the last decade.
As today, tech stocks were driving US returns and commentators were questioning how long the party could last, because it could not last for ever.
“The similarity could even be extended to Neil Woodford’s funds being written off after a period of extreme underperformance, as they were during the dot.com boom, as his value approach was left stranded by the ever-accelerating ‘stocks of tomorrow’,” he added.
Indeed, over the last year, the FE Alpha Manager has struggled, with the flagship £6.6bn LF Woodford Equity Income fund down 10.78 per cent while the market and average peer in the IA UK All Companies sector are up 7.65 and 6.65 per cent respectively.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
In the late summer of 1998, Russia’s default and the collapse of the Long Term Capital Management fund led to a 22 per cent of the S&P 500.
However, this was not the end of the bull run, despite many ringing the bell prematurely, as the rally continued to a further 18 months, adding a further 68 per cent.
“When it did well and truly burst in March 2000, technology was decimated. Yet we had forgotten ourselves, until reminded by BCA Research that, outside the technology sector, the S&P 500 actually rose 9.2 per cent between March 2000 and May 2001,” Merricks noted.
“Today, it often feels like the S&P 495 is not doing that well, while the five megastocks at the top of the index surge ahead.
“The explosion of winner-take-all markets has allowed the most successful companies to dominate the stock market indices, while second-tier companies get pushed to the sidelines.”
Performance of stocks since 1965
Source: Skerritts
As such, it may be worth investors keeping an eye on the much-maligned value stocks, which began to outperform growth in 2000 following the market crash, although growth will continue to outperform until the end of the bull run.
“Today, value has massively underperformed growth for around 11 years and Neil Woodford’s being written off again,” the Skerritts head of investments said.
Yet while the first six months of 2016 saw a massive rotation from growth to value and value investors got very excited that their years in the wilderness had ended, it was short lived.
As such, there is the potential for a slightly longer resurgence down the road, although this is not enough for Merricks to abandon his growth bias just yet.