While some went gaga this week over the Budget bus fare cap and whether the word “supporters” included an apostrophe, the Lancet published a new Countdown report on health and climate change. It couldn’t be seriouser.
Ten of 15 indicators of hazards, exposures or impacts hit record levels last year. For example, global data show that almost half the earth’s land surface suffered at least one month of extreme drought — up from 15 per cent in the 1980s.
Likewise, extreme rainfall was above the study’s baseline (average between 1961-1990) in almost two-thirds of the world — another first. On Tuesday, in the town of Chiva, near Valencia in Spain, almost a year’s worth of rain fell in eight hours, causing death and devastation.
And there is little hope it seems. Also this week, analysis from the UN revealed that greenhouse gases are accumulating faster than at any rate in human history. Emissions will barely decline by 2030 versus 2019, it estimates.
Yet we need a 40 per cent or so reduction by the end of this decade to keep global temperatures in check. The UN warned that “national climate plans fall miles short of what’s needed to stop global heating from crippling every economy”.
Crippling EVERY economy! Yikes. No wonder assets all around the world — the prices of which discount risks years and decades into the future — are reeling under the threat of such an existential catastrophe.
Actually, er, they aren’t. The S&P 500, Nasdaq and Dow Jones in the US again reached all-time highs this week, before Halloween spooked them. Ditto in the past fortnight, the Dax, Ibex and other exchanges in Europe — as well as Australia’s stock market. Canada’s too.
Meanwhile, Indian shares have clocked successive highs this year. And despite Africa and South America being particularly exposed to climate risks, says the UN, the local bourse in Brazil hit another peak in September. Nigeria’s has tripled since January.
The list goes on. Global house prices, precious and industrial metals, cryptocurrencies (these historically move with risk assets, however defensive “preppers” think they are) and artworks, to name just a few, are also at or near all-time highs.
Record climate risks. Record asset prices. If we’re doomed, how so? There are three possible answers to this puzzle: either climate-related investment risk is negligible, it’s already discounted in prices, or financial markets are delusional.
If not for making this rather obvious point in a speech a while ago — and suggesting option one the likely answer — I would not be writing this column. Then again, nor would ridding my portfolio of US stocks last September (doh!) have been so embarrassing.
I have written often about whether to jump in again. This raises a crucial question: is it ever right to buy equities at all-time highs? It certainly feels wrong. Finance theory would concur. Expected returns mathematically drop when prices rise.
And vice versa, of course. Therefore, I’d love the S&P 500 to crash. Thursday was a nice start, and next Tuesday looms. It feels improper, however, to dream of Americans with face paint, horns and raccoon hats running amok following the US election, just to give me a better “in” price.
I needn’t worry, though. It turns out that buying at all-time highs isn’t stupid in the least. One reason why is obvious: if equities generally go up, which they do, record levels will occur often. Just this year the S&P 500 has clocked up almost 50 of them.
Sure, timing ups and downs helps returns. But even if you are mega unlucky and only press “buy” whenever the S&P 500 hits a new peak, the chances are you won’t suffer much compared with investors who purchase shares each day.
Thankfully, RBC Global Asset Management has crunched the data so I didn’t have to catch a train to the office to use Bloomberg. Over any five-year period since 1950, the numbers show, “buy at the top” returns only trail the returns from indiscriminate buying by one percentage point.
More amazing is how infrequently US share prices collapsed after reaching one of those 1,250-odd peaks. Five years on, for example, investors who bought at any top were never down more than 10 per cent on average. One year on, the probability of losing a tenth of your money was just 9 per cent.
In other words, don’t fear the highs. Share prices soon recover. Indeed a huge chunk of all global equity returns come from rebound days — as I’ve written previously — which tend to closely follow sell-offs. Miss these by trying to be clever and you’re screwed.
But professional investors are paid to be clever. On Monday, a version of the Vix index which measures implied volatility using options that expire in nine days, rose above the version that references 30-day options. This is very rare because usually more time passing equals more risk.
US Presidential Election 2024
Clearly some investors reckon November 5 will be a total hit show, as they say. By that logic, though, I should also ditch my other equity ETFs ahead of the US vote, as they would invariably follow the S&P 500 south.
Indeed, I recently mulled being 100 per cent invested in cash for a week or two just in case. If the UK Budget or presidential election or whatever in the Middle East turned out better than expected, I could buy back in with limited opportunity cost.
Why didn’t I? A chaotic US poll has been pondered for so long that surely some madness is already in the price. And one of the main reasons I only own equity markets that are unequivocally cheap is because they are more defensive.
That means while I have less fun when riskier assets are partying like mad, the likes of Japan, Asia and the UK should fare better if Washington voms. The analysis above, however, suggests I should buy US shares regardless.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__