Equity markets, what do we know?

Since our last note, equity markets have continued their very strong recovery, with the Nasdaq making a new all-time high. Who would have thought this possible in the middle of March, and what can we learn from it?

The big lesson must be one of humility around market forecasts and a deep scepticism when it comes to short term forecasters.

Over the past few weeks, I have spent many hours chatting to clients about the obvious risks we see today and the great level of uncertainty. I have also listened to many commentators offer bold predictions about what will and will not happen next.

In my conversations, I am frequently asked for my view on what will happen next; it is often framed from the perspective that the worst is around the corner.
My answer is: I do not know. Whilst this may be an unsatisfying response, I am not an epidemiologist and I do not have a clue what the market will do for the rest of the year.

However, having worked in the investment business for a long time, I have learned to expect and embrace uncertainty.

I do not know what is going to happen and I am fine with that. In fact, I could sum up my view by saying that the more I know, the more I realise how much I don’t know.

I do, however, know what I believe to be key investment lessons. I know that long-term investors have historically been rewarded in a capitalist system. I know that the longer we hold diversified portfolios, the lower the probability of loss. I also know that the equity risk premium (the additional return we will likely get from equities over bonds) is reasonably high today.

I also have a few opinions that I think will prove correct, but I do not know for sure. I believe that investors should position for accelerated technological change for the next decade. I think there is a reasonable chance that we are in the midst of a very long-term bull market, supported by advances in technology and productivity, and that this year’s setback was an interruption of that longer-term trend. I also think interest rates will stay below inflation for a very long time.

If you consider what I believe I know and what I think, perhaps you can see why I am not interested in trying to call, or time, markets in the short term – that would be far too hard.

I absolutely recognise the great uncertainty many of us face today, in our lives and our businesses.

I also respect the fact that the sell-off into March was harrowing and that for many the inclination is to sell now, having recaptured those temporary losses.

However, we are long-term investors and aligning our portfolios with what we know, and what we think most likely, seems like the most sensible approach for us and our clients.

As ever, please do not hesitate to contact us to discuss our views further.

Ian Quigley
T: +353 1 421 0300
E: ian.quigley@brewindolphin.ie

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