Equities showing potential. Four reasons why stock market trends are pointing up.
Economic fluctuations are still possible, but investors can use equities to benefit even from the current stock market trends. That is because they still offer upside potential. So, it is advisable to have a well-thought-out investment strategy that will pay off in the long run.
Reexamine your investment strategy regularly
It takes a well-thought-out investment strategy to turn a profit on equity markets over the long term. That is because it is the strategy that determines the lion's share of an investment portfolio's long-term performance. Therefore, it is even more important for investors to examine their strategies on a regular basis. It's vital to pay attention to the following factors:
- First of all, review your long-term capital market assumptions and check to see whether the expected returns, risks, and correlations are still realistic. The best way to do that is with the help of your bank, which will consult numerous experts to perform the calibration.
- Questioning your individual yield and risk targets is the second part of any strategy review. Individual preferences can change – even subtly.
- Regularly analyzing your situation reveals new alternatives for adapting your investment mix and its implementation. The goal is to find the right investment strategy for a particular point in time. That is difficult – especially now, given the changing situations affecting interest rates and stock exchanges around the world.
Equities remain attractive to investors over the long term
A fleeting comparison of the recovery on the S&P 500 this year with the one following the Great Depression from 1933 to 1936 could give the impression that the happy days on the stock market are already over. However, there is something that people shouldn’t forget: At the end of 1936, the S&P 500 was sitting at 17 points. That number has risen to 3,500 points today. According to the 2020 Credit Suisse Global Investment Returns Yearbook, Swiss equities have also generated a nominal return of roughly seven percent annually over the past hundred years. Those are good indicators. What's more, there are many signs in favor of equities today.
Four reasons why stock market trends are pointing up
1. History's greatest economic shot in the arm
Four major stimuli are keeping the US economy afloat right now. We are referring to the boosts from fiscal policy, monetary policy, currency exchange rates, and bank lending. The total cost of this year's stimulus measures is roughly twice as high as the amount spent during the great financial crisis of 2008. It's no wonder these measures are causing the stock markets to fly high again.
There may be no turning back now. The success of the government efforts to revive major segments of the economy has stirred faith in many that anything is possible. That makes near-term debt reduction an illusion, and it stands to reason that the same level of stimulus will be applied during any future crises. That will work, too – but only as long as the government has access to unlimited amounts of capital free of charge.
2. Employee benefits funds need higher equity holdings
In the aftermath of the 2008 financial crisis, pension funds the world over have reallocated on average 11 percent of their investments from equities to bonds and real estate. That change has thus far not been reversed. Now, however, many employee benefits funds are planning to increase their equity holdings again.
On a global scale, they hold investments worth the equivalent of approximately 100 trillion Swiss francs. That shows that the reserves on the stock markets are by no means close to being exhausted.
3. Low risk score
Equity valuations indicate further upward potential. Depending on the market, the risk premiums on equities might be suggesting potential gains of between 10 and 30 percent over the next 12 months.
4. Protection against inflation risks
Many investors are afraid of creeping inflation. That fear is exacerbated by the fact that governments today are the biggest debtors. However, investors need to keep some things in mind. First, modest price increases usually also mean modest profit increases (the "pull" effect). Second, they lower the value of bonds, triggering reallocations to equities (the "push" effect). Only when rates reach 3 to 4 percent does inflation undermine the value of equities.