Despite last week's market volatility, the US economic recovery looks strong and the Federal Reserve has hinted that it will only raise interest rates if the outlook appears sustainable. However, while the 30- big company Dow Jones Industrial Average was up 30% last year including dividends, and only minor falls so far this year have impacted it, the latest data on loans used to buy shares show that margin credit is record highs.
The Financial Times says today that peaks in margin trading have been a precursor to bear runs in the past, notably in March 2000 and July 2007.
Margin debt collated by the New York Stock Exchange peaked in February at $466bn and stood at $463bn in August. The peak in 2007 was $381bn. It hit a low of $173bn in early 2009, according to the FT.
The Wall Street Journal warned in a piece on Friday that short-term issues such as Ebola and German industrial data, should not be the focus of long-term investors.
It said that: "An enormous body of academic research has proved time and again that your long-term investment returns will overwhelmingly depend instead upon just two things: asset allocation—how you spread your money between investments like stocks and bonds—and the value of those investments when you buy them."
"Based on simple investment fundamentals, Boston-based GMO, a fund-management firm with $117bn under management, predicts that over the next seven years or so, investors should expect overall returns from most assets to be far below average. A typical balanced portfolio composed of those asset classes, GMO argues, may be lucky to beat inflation at all over that period.
Research Affiliates, an investment adviser in Newport Beach, California predicts mediocre returns over the next 10 years from nearly all asset classes. Only emerging-market stocks and emerging-market bonds are likely to match the historical returns from U.S. stocks and beat inflation by an average of five percentage points a year or better, the firm warns in a new forecast. Research Affiliates’ investment strategies are used by money managers with $180bn in assets."
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