SOME RED FLAGS
There is no denying there are red flags emerging for both the US and other global equity markets, and these risks are well documented. Research, however, has repeatedly shown that correctly guessing the timing of market falls is difficult, and that it is rarely a good idea to liquidate equity portfolios.
How, then, should investors respond to these concerns? The correct course of action is not to change the total amount of equities held, but rather to change their composition, and how they are managed. Stress tests should be conducted to ensure that portfolios are robust enough to withstand (or ideally even prosper from) sizeable bouts of volatility, and to adjust to the fast pace of technological change that we believe will pervade absolutely every industry.
Looking at fundamentals alone, the S&P 500 looks unimpressive and perhaps a bit concerning – earnings growth has been negative, profit margins are also declining (albeit from elevated levels), and firms remain reluctant to invest in capital spending, resulting in an aging capital base.