US interest rate hikes are coming but there's no rush to do so, Federal Reserve chief Janet Yellen announced last week, an unexpectedly dovish message that brought relief on Wall Street.

Rates – near zero since December 2008 and not raised in almost nine years – seem unlikely to be hiked before September.

Morgan Stanley even predicts the Fed will wait until 2016, although that’s a minority view, with 15 of the 17 members of the Fed’s policy- making committee expecting a rate rise this year. Fed members’ rate projections for the end of 2015, 2016 and 2017 have all been reduced by 50 to 75 basis points.

Globally, rates have been cut 558 times since late 2008, Merrill Lynch noted recently. Accordingly, even seemingly minor hikes can have major consequences, as International Monetary Fund chief Christine Lagarde cautioned last week.

Ray Dalio of Bridgewater, the world's biggest hedge fund, is especially wary, seeing echoes between recent times and the years leading up to 1937.

Both periods saw major crashes (1929 and 2008), followed by rock-bottom interest rates, money-printing, a cyclical recovery and a multi-year rally in risk assets. In 1937, however, premature central bank tightening caused another downturn and a halving in stock prices.

Dalio may be overstating the parallels.

Unemployment was much higher in 1937, and the rate hikes were accompanied by major fiscal cutbacks.

However, nor is he given to hyperbole.

Dalio is hugely influential among institutional investors, and his historical outlook helped him foresee the 2008 global financial crash as well as the multi-year recovery that began in early 2009.

For now, the Fed seems to be prudently heeding his advice to “err on the side of being later and more delicate than normal”.

No stopping the European train

European stocks are soaring, and sentiment is euphoric. Is a pullback in the offing?

One might think so, especially in Germany. Up 45 per cent since October and by 20 per cent in 2015, the Dax’s recent nine-week winning streak marked the longest such run since 1998.

As for Europe, the latest Merrill Lynch fund manager survey shows exposure to European equities is at record levels, while US exposure is at its lowest level since January 2008.

A valuable contrarian indicator, Merrill’s survey implies the S&P 500 – flat in 2015 – may be due a period of short-term outperformance.

However, history suggests otherwise. According to Nautilus Research, there have been six periods of similar market momentum in Germany over the last 45 years.

One month and three months later, stocks were higher on each occasion, averaging substantial gains of 5.35 per cent (more than seven times the average one-month gain) and 12.69 per cent (almost six times the average three-month gain) respectively.

Six months later, stocks averaged gains of 9.71 per cent, rising on five occasions.

Nautilus reports similarly impressive results from Japan, another high-flying market in 2015.

As for the US, the firm adds, flat markets in the early part of the year tend to continue to underperform.

Strength begets strength. Europe (and Japan) should continue to lead the way.

US facing subdued returns

The US bull market recently celebrated its sixth birthday, with stocks rallying more than 200 per cent during that time frame.

However, subdued returns are more likely in coming years.

According to Michael Batnick of Ritholtz Asset Management, there have been 54 prior periods where six- year returns exceeded 200 per cent.

On average, stocks gained just 9 per cent over the following three years, compared with average historical three-year returns of 38 per cent.

Negative returns were seen more on 35 per cent of occasions, more than double the historical norm.

In other words, returns following strong runs “have been one quarter of the average three-year return with negative returns occurring twice as often as we have seen historically”.

One consolation: Batnick notes returns over the last 10 years remain below historical averages.

The next few years may be tricky but it’s hard to argue stocks are bubbly given the last decade’s muted returns.

Paying for underperformance

Last year, 86 per cent of large- cap managers underperformed the S&P 500. Over five- and 10-year periods, 89 per cent and 82 per cent respectively failed to beat the market. Despite this, active managers insist they can provide value, especially in less efficient markets, such as small-cap or emerging markets.

Unfortunately for investors who cough up high fees in the hope of beating the market, this is bunkum. The latest scorecard from S&P Dow Jones Indices shows 88 per cent of US small-cap funds failed to beat their benchmark over the last 10 years. Emerging-market funds did even worse, 90 per cent underperforming.

Large-cap funds, small-cap funds, emerging market funds – whatever the space, the odds of picking a top performer are absolutely awful.