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Q4 2020 Market Review

Economic Update




"Market performance in 2020 is yet another demonstration of the power of investing for the long term.
John Butters - Chief Investment Officer

An overview of markets in 2020

A year ago I argued that a coronavirus pandemic was likely, but also that stock markets had not generally fallen in pandemic years. The pandemic has been far more terrible than the historical comparisons would have suggested. But, nonetheless, markets have followed their historical pattern, with global stocks rising by 12% in 2020. Bonds also had a good year, with UK government bonds up about 10%, confounding the sceptics yet again. The UK market did poorly, owing to its lack of big tech companies and heavy exposure to energy and mining.

Have markets hit a new high?

As always when markets go up, people are talking about whether they have got too high. One argument that markets are overvalued is that the average price of listed companies, particularly in the USA, is high compared to their last few years’ average profits. Prof. Robert Shiller, who popularised this way of valuing markets, has recently written a new paper on the subject. He points out that markets are expensive only if you ignore the effect of low interest rates. Investors look at financial assets relative to each other so, in theory, low interest rates (for example, on bonds) should mean higher share prices. Taking that factor into account, global markets do not look at all expensive – if anything, they look cheap compared to their long-run average.

A second argument is that individual traders, bored at home and finding markets a welcome diversion, are showing the kind of exuberance that can lead to a stock market bubble. This could happen; but recent stories like the pumping-up of GameStop are more suggestive of cynical trading behaviour than the optimistic belief in ever-rising prices that drives a bubble. Some people have been crying “wolf” on bubbles ever since the housing bubble burst in 2008. We should not necessarily ignore them, but we should be sceptical.

Looking forward

Our view remains that trying to forecast markets is a futile exercise, and one that is likely to cost more money than it makes. Market performance in 2020 is yet another demonstration of the power of accepting that reality, giving up market timing, and investing for the long term.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

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