Even in powerful bull markets, multiple corrective phases are healthy, major averages can correct for months and a 20% pullback (at the more extreme end) is normal.
In times of elevated valuations, Cash is a valuable asset. We have raised our cash allocation by taking profits on full and over-valued assets in preparation for buying opportunities.
Here we provide a brief consideration of the economic and market environment. Referencing three noteworthy components of current market conditions.
- Unusual uncertainties. Number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term implications of technology.
- Asset prices high across the board. Prospective returns are just about the lowest they have ever been. Almost nothing can be bought below its intrinsic value, and there are few bargains.
- Pro-risk behaviour is commonplace. Investors embrace increased risk as the route to returns they want or need. Investors search for what is ‘less-overpriced'.
Valuations and total returns have been highlighted within both Strategists and at OUTLOOK over the past 12 months - stock market valuations remain elevated relative to historical norms.
“Short-term cyclical Bear Market amidst the long-term secular Bull Market.”
OUTLOOK 2017: Booklet, Page 16
“Elevated equity valuations may constrain future returns but they do not prevent them.”
The Strategist: 4Q, 2016
This cycle is not unusual in form, but only in extent. Market corrections are normal, and even healthy, as they present bargains for the patient investor. As opportunities arise, we will put additional cash to work, adding to existing positions and purchasing new companies with excellent long-term growth prospects.
We continue to raise our cash allocation slightly, taking profits in positions where valuations cannot be justified - Cash is an asset class.
Ultimately, we are late in the cycle and it will be the decisive, confident and determined that come out on top.
It's What You Pay!