Multi-Asset

Three coping strategies for a mature bull market

In the monthly update of our multi-asset team's asset allocation views, we discuss the best way to approach this stage of the market cycle.

03/28/2018

Johanna Kyrklund

Johanna Kyrklund

Global Head of Multi-Asset Investments

After an incredibly strong 2017, and the rapid recovery in markets following the early February sell-off, it is perhaps inevitable that investors are rethinking their strategy. 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 you 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 cannot afford to sit out this stage of the market. 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 into alternative exposures such as relative value and currency strategies. Within equities, we have some exposure to value stocks as they have lagged the rest of the market and exhibit lower sensitivity to interest rates.

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.

For a round-up of our latest asset allocation views and an update on our cyclical indicators, please see the PDF below.

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.