Will the bull market run out of steam? With the FTSE at all-time highs, we look at whether investors should hope for more gains or brace for a crash

Is the bull market in shares too long in the tooth? This is a question many investors are asking themselves.

The stock market has been on the rise since 2012 and no political upheaval or global threat seems to be able to stop it in its stride.

But can it keep going up for another year or so? Or, are we due a correction or even a bear market?

Is this the last leg of the bull market? Investors should diversify to protect capital

Is this the last leg of the bull market? Investors should diversify to protect capital

Personal investment expert Darius McDermott, of Fund Calibre, says this is a question that quite rightly vexes investors.

His first thought on the issue is a warning from Jeremy Grantham – who is co-founder of global investment management firm GMO and has correctly predicted various corrections over the years. 

He recently said markets could experience a near-term 'melt-up' where asset classes rise aggressively before they come crashing down. 

McDermott says: 'In what is strictly his personal opinion, Grantham believes there is more than a 50 per cent likelihood that we will experience more steeply rising markets within the next six months to two years. 

'If this does happen, he believes the odds of the bubble breaking will reach more than 90 per cent and markets could lose half their value.'

Will investing history repeat itself?

McDermott points to the last significant market sell-off (using the FTSE 100 as an example) was between 15 June 2007 and 6 March 2009, during the throes of the global financial crisis.

Between 7 March 2003 and 15 June 2007 – which is the stretch of time the market rose for before it sold off, it gained 123.56 per cent. Nearly one-fifth of this rise happened during the last 12 months of this period.

'If we look at how the FTSE 100 has behaved between March 2009 and now, it has gained 202.58 per cent and just 5 per cent of these returns have been achieved in the last 12 months. 

On the up? The FTSE 100 has been climbing higher over the past decade

On the up? The FTSE 100 has been climbing higher over the past decade

'Does this mean the market is already slowing and we could experience a soft landing, or are we still at risk of a sharp fall?

'My FundCalibre colleague Clive Hale believes that while economic and corporate earnings growth are doing well at the moment, equity valuations have reached absurd levels, which implies that investors could make a negative return on their investments over the next 10 years if they buy in when asset prices are so high.' 

Of course, the more expensive the stock is, the more difficult it becomes to make money.

McDermott says Hale is also warning that there is therefore high potential for a crippling bear market in the next one to three years.

Hale has said: 'With equity markets enjoying a great start to the year, the bullish narrative is fully intact. In fact, even the bears are admitting that there is logic behind a melt up in the months ahead – when noted bears capitulate, history shows that the end of the bull market is relatively near.'

Darius McDermott of FundCalibre

Darius McDermott of FundCalibre

But while we wait for the bubble to burst, Julian Chillingworth, who is chief investment officer at Rathbones, agrees that markets could still rise for the next couple of years, although investors' expectations have to be realistic.

'Barring a sudden global downturn, equities should offer adequate returns – better than bonds, at least. But expectations should be tempered, lest irrational exuberance get the better of us,' he said.

Stock selection will be key 

McDermott also agrees that the economic backdrop looks stable. 'Certainly in the UK, inflation isn't high enough to cripple most households, GDP figures are solid and, generally speaking, there don't seem to be any imminent signs of a recession rearing its head.'

So is this the last leg of the bull market? 

'It is a fool's game to try to time the market,' he says, 'and, while we see reasons for optimism, we still believe it pays to tread carefully at the moment and remain selective.

'For instance, we think European, Japanese and emerging market equities in particular could reward investors more handsomely over the long term.

'Investors should make sure their portfolios are balanced and well-diversified so that, if there is a sharp downturn in the market, they can cushion themselves from at least some of the falls.'

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