As if it were the rampant cavalry of Rossini’s Guillermo Tell, which ends its first act almost flying, the world has recovered at a gallop. We have witnessed the greatest growth in the last 50 years. Pre-pandemic levels have already been reached in terms of GDP and profits of listed companies – which are 12% higher than before the COVID – while indices such as the S&P 500 are worth 27% more than then.
In the last 11 months we have also become spoiled for an exceptional absence of volatility, as we have to go back to 1990 to see such a long period without the S&P 500 having undergone corrections of more than 5%.
Now, although the world is entering a more mature phase of the cycle, after experiencing its maximum acceleration in June, it will continue with solid growth and well above its historical average of 3%: 5.6% this year and 4.6% % in 2022. After 15 months of reactivation and even though we may find ourselves in a faster cycle than the previous ones, it seems early to end it, knowing that the average longevity since World War II has been five years.
Meanwhile, the Fed will begin to withdraw stimulus from November, a process that usually generates “noise”. However, in the search for a balance between growth and inflation, the Fed and the ECB have made it clear that there are many months to go before the first and gradual increases in interest rates begin.
Despite these arguments that justify the positive potential for the Stock Exchanges in an environment in which volatility will be increasing, the temptation to enter the game of buy and sell is great. Before venturing into this complicated art, we recommend that you consider that missing the five most profitable days of the market, at this stage of the cycle, has meant a total loss of investment of more than 20%.
Likewise, rather than focusing efforts on exposure levels, it is important to make a correct sector selection. For example, the excess return of technology in Europe or energy in the US, since the beginning of the year, is greater than any type of correction the S&P 500 has had during any intermediate phase of the cycle since the 1950s.
This new, more volatile period that is now opening should not confuse us; we are still in the same show and it is important not to leave before the performance is over. Following the simile of William Tell, although the gallop has already finished, we must make a rest immobile: yes, that moment of the third act in which you have to not move because Guillermo is going to shoot an arrow at an apple located above his son’s head.
Although we are entering an uncomfortable phase, the bottom of the market is good and there is still a cycle ahead: rest immobile and the effort will be well rewarded.
Joan Bonet Majó is director of market strategy at Banca March.
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