Does the late cycle expansion mean it is time to get out of the market? - J.P. Morgan Asset Management

Does the late cycle expansion mean it is time to get out of the market?

Contributor Samantha Azzarello
With no official timetable telling investors when macro and market environments reach late-cycle, many investors are worried that the current bull market is over-extended. While some normal late-cycle indicators, like rising wages and sustained above-trend GDP growth, are not present, others are: M&A activity is at record highs, corporate margins are falling and volatility and skew are rising. Investors seem to think that these signs spell “late-cycle”, and sentiment has adjusted in turn. But it is important to remember that being late cycle does not mean that the end is near; indeed, this “late stage” could be long, sticky and drawn out, just like the broader cycle. Calling the end would be a fool’s errand, and could result in missed opportunities.

As the chart shows, late-cycle returns tend to be substantial. While the nature of, and end to, each cycle differs, the average return for the two years preceding a downturn is almost 45%; even for six months preceding, that return averaged 14%. This suggests that exiting the market too early may leave considerable upside on the table. Moreover, the truism applies that timing the exit also requires timing re-entrance. Critically, the impact of those activities tend to significantly hurt returns.

Instead of panicking, investors should be thoughtful in managing their money moving forward: participate in the upside, but try to cap downside through hedging; make no big directional calls, concentrated positions or risky bets; do not abandon good quality fixed income now, even if recent performance is disappointing; have a bias to quality across asset classes and prioritize volatility dampening; take capital gains where it makes sense. Most importantly, rebalance, stick to a plan and remember: get invested and stay invested.
S&P 500 returns leading up to market peaks

Sources: Standard & Poor’s, Barclays, FactSet, J.P. Morgan Asset Management.

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