Whether or not we see a Santa Rally this year, both the Dow Jones and the FTSE100 have already been flying high as we approach the year end, despite most expert predictions and the Brexit and Trump votes.
On Tuesday this week, the so-called “Trump Bump” saw stock markets rise in the US, with the Dow Jones Industrial Average trading at a new all-time high of 19,974.62, its 17th record finish since the US election in November. The FTSE100 too has flirted with record highs and is still trading at over 7000. At close of play last night, it is currently 13.1% up on the year to date, whilst the Dow Jones is 14.3% up on the year.
Most experts were not only wrong about the outcome of the Brexit vote, they were also wrong about the outcome – with many projecting falling UK markets should a vote for Brexit happen. Experts were equally wrong about oil prices. When oil dropped to $27 a barrel in January, some, including RBS, suggested prices would fall to $16. Oil is currently trading at over $54 a barrel. Many economists also expected the Federal Reserve to raise interest rates three times over the year, whereas they were raised only once, in December, by a quarter-point.
What this demonstrates is not that ‘experts’ know nothing but that political events and world markets have become increasingly difficult to read. For example, Trump’s election victory has seen cyclical stocks, such as banking, start to do well compared to defensive stocks such as the consumer goods sector, something that would not necessarily have been predicted. In such an unpredictable world and with volatile markets, it emphasises once again the value of holding a diversified portfolio.
So what does 2017 have in store? If anything, it looks even more difficult to read. Theresa May has to trigger Article 50, whilst Trump is proposing cuts to tax and regulation whilst adopting a protectionist stance. Then there are elections in the Netherlands, France and Germany, and these could see a continuation of the populist surge.
Further tensions between the West and Moscow could develop, whilst the biggest threat to your wealth could possibly be China. With government, corporate and household debt there now estimated to account for 240% of national income, any further slowdown in the Chinese economy could hit worldwide markets and possibly even signal the beginning of the next financial crisis.
Indeed, the year 2016 started with concerns over China and saw stock markets fall and bonds rise. In the days immediately after Brexit, bonds moved in the opposite direction to stock markets. The message is clear – maintain a diversified portfolio.
Diversification is not just about boosting performance but helps to manage risk. By agreeing a level of risk that you can live with, based on your goals, time horizon and tolerance for market volatility, a diversified portfolio has the best chance of achieving your aims. Then there’s less need to worry about all the noise in the marketplace.
Bear that in mind as we enter the festive season – and talk to us in the New Year!
In the meantime, a very Merry Christmas to all - and a prosperous New Year.