Thoughts from the Investment Desk

Coping Strategies for Mature Bull Market


Johanna Kyrklund

Johanna Kyrklund

Global Head of Multi-Asset Investments

After an incredibly strong 2017 and as we mark the 10th anniversary of the Great Financial Crisis, it is perhaps inevitable that emotions are starting to run wild.  We’ve barely started the year and already we have read commentary on how to position for a “melt-up” in equity prices as well as commentators pointing to the possibility of a 1987 style market crash.  Against this backdrop, we offer a three-step guide to coping with a mature bull market.

  1. Don’t be greedy.  In the aftermath of a bear market, we believe we should be focused on capturing as much of the upside as possible as valuations snap back to neutral.  However we are at a very different juncture now, valuations are stretched and at this point of the cycle we believe that you should be ready to leave some return on the table.  Don’t chase those growth stocks!

  2. Be diversified.  One of today’s challenges is that, with cash rates so low, we also can’t afford to sit this stage of the market out.  Although the Federal Reserve is raising rates, central bank liquidity from Europe and Japan is still plentiful and markets could continue to grind higher.  To help stay prudently invested, we suggest spreading your risk across a range of return sources.  For example, we have been diversifying out of equities into commodities and government bonds.

  3. Plan your exit strategy.  What indicators are you watching to trigger a shift in direction?  Identify those triggers now and be disciplined.  In our case, we are focused on our cyclical indicators which are still indicating a benign environment but a shift to what we call the “slowdown” phase of the cycle would prompt a shift to a more defensive strategy.  Secondly, use those low volatility days to plan your defensive strategy.  We are running our portfolios through a number of scenarios to identify what shifts might be necessary: you don’t want to adjust your strategy “on the fly” in the midst of market volatility.

An update on our cyclical indicators

Our cyclical indicators still point to a benign environment with developed markets in the “Expansion” phase and emerging markets in the “Recovery” phase.  The recent move towards 3% on the US 10 year is a challenge to market valuations but the weaker US dollar has helped to loosen monetary conditions and the steepening of the yield curve suggests belief in the sustainability of the upswing.

Source: Schroders, January 31, 2018. Note: US output gap measure based on our own estimate of the output gap. For the Eurozone and Japan, the output gap estimate is using Oxford Economics' estimates. 1Signals from each indicator are the same.  2.Historical time series of the signals for each of the indicators.  Agreement that all three indicators are giving the same signal is highlighted in blue.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.