New Bull Market?
The S&P500 has been declared to be in a new bull market, rallying almost +24% off its October low. Global stocks (measured by the ACWI) are close behind, with over +20% off the lows. This is the largest rally since the market peaked in January 2022. Since late last year, our communication to clients was that a market recovery was to be expected in the face of bad news and buying in when markets were down was a good long-term decision. Hopefully those who heeded the call are feeling a little less anxious now!
You usually see shoppers rush to take advantage of discounts at various department stores on Black Friday or during the Great Singapore Sale but when stocks are beaten down in price, investors dump their positions. When prices rise, investors get more excited, dive back in and load up on stocks. This is really peculiar behaviour.
As for the S&P500, the 2023 rally is driven by a few large stocks. Nvidia is the top performer in the index and has surged +156.43% this year. It is trading at over 38x sales and over 200x earnings! The closest parallel in recent times was Tesla when it traded close to 30x of its sales back in 2021, before subsequently going on to lose 70% of its value.
Research has shown that valuations do matter when it comes to future returns and when there are large differences between the prices of traditional growth and traditional value stocks, we expect future premiums to be larger than average — i.e. we can expect that an upcoming good run from value stocks.
Other sectors trading cheaper are developed international stocks and emerging market stocks outside of U.S. — now trading at lower valuations, giving us the confidence to expect higher returns for these markets in the future.
We have written on previous periods of time where international stocks have outperformed U.S. stocks here. While we don’t know when these periods will start or end, current valuations provide us with a very strong case to stick with a globally diversified allocation so that we are able to enjoy the benefits of higher expected returns from the broader market and not only the US or tech sector.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
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