Last week saw US equity markets continue to hit record highs. It seems that the enthusiasm over the anticipated policies of President Trump continues. His State of the Union address to Congress tomorrow may add some meat to the bones of speculation. Let’s hope so, anyway, as it would make a change to move away from the seemingly incessant barrage of nastiness. The positive note in the US was not matched in Europe, where most equity markets were subdued and closed the week lower. No real surprise there, though, given the political events looming large on the horizon.
At the beginning of the year we adopted a slightly more cautious position, taking some profits and keeping the proceeds in cash. At the time, we made it clear that this was a short term position and our medium and longer term views remained more positive. Our concern then was that there are so many potential points of bad news that there could be some bumps. Well, so far, these have not materialised. In fact, many equity markets are slightly higher now than they were. Did we get it wrong?
We still feel that there is too much short term complacency amongst investors. In some ways it is easy to see why. Doing nothing has its attractions. After all, why take more risk when markets are expensive and the political background so challenging? Equally, why go risk off when the economic data from almost all key markets is so positive? It does seem so easy to do nothing in such circumstances. Well, we do not have that luxury. We have made our call and reduced our exposure to risk. With new money coming in, we are also being very selective about putting it into the market at these levels.
In short, we do not see our position as something that we have got wrong. Hindsight is a wonderful thing. And timing markets is also notoriously difficult. This is why we try to avoid short term noise and focus, instead, on longer term themes. One of those themes, for us at least, is that risks are high at the very same time that most asset prices are high. In our view, that combination does more than just suggest prudence – it positively screams it. It is certainly not our job to risk our clients’ assets for the sake of a few percentage points of gain.
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