Investors are concentrating more on positive economic news ' even if they are still to act on it
Is it the first outbreak of tinsel and Christmas jingles or the odd ray of sunlight through the rain? Can you detect just the faintest signs of confidence returning to the markets? It is so elusive that it almost tempts fate to mention it at all, but the deep gloom of the last few months appears to be lightening. There is nothing like an upswing, or even a turnaround, in prospect. It is just that the outlook appears to have stopped getting worse.
Instead of endorsing every downbeat projection with extra warnings, analysts seem to be allowing the possibility that, on balance, things could get better from here. Could you be a little more unequivocal, please? Well, in both the UK and the US, where there is positive and negative economic data released, investors are ignoring the negative, although they are not yet acting on the positive.
In the US, consumer confidence indicators hit a nine-year low in October because of falls in the stockmarket, the threat of war with Iraq and general economic uncertainty. But this sentiment has not dented consumer spending yet and house sales are soaring. The recent half percentage point interest rate cut from the US Federal Reserve will help sales over the Christmas season and may be enough to lift other markets as well. Revised trade deficit data for the US showed third- quarter figures were stronger than originally thought, suggesting that fears of a double-dip recession may be unjustified. There has been some encouraging corporate news, and unemployment claims are falling. In the UK, retail sales data for October has come out well ahead of most projections. Most people now recognise the bubble in the housing market, but there are whisperings that the FTSE 100 might make 4,500 by year end.
The next two months will be critical for the global economy. If stock markets can consolidate and build on tentative investor confidence, and a major conflict can be avoided in the Middle East, there is a new willingness to get back to business. There is plenty of cash around, although liquidity has not reached the levels (18% plus) that built up after the 1974 bear market. Most institutions are underweight equities and would not want to be caught out by a rebound. While many investors can spot an overheated market, and sell out, it is more difficult to call the bottom and buy back in. But if you believe in the long-term prospects for equity investment, it is increasingly difficult to justify remaining on the sidelines. There are various ways of calculating prospective equity returns, and at the moment most of them are coming up with projections of around 8% growth per annum.
So we are nearer a low than a high, surely? There are several markets, sectors and stocks offering better value than they have for some time, and barring nasty geo-political shocks, corporate earnings are likely to revive in the next six months. Equities are again attractive compared with bonds, which, if economic growth is about to revive, are getting a little expensive. So once all the data and analysis is on the table, and all the models have been run, the final question comes down to whether to buy. Investors, both institutional and retail, are constantly urged to be consistent and logical, when the opportunistic and inexplicable often prevail. Going into 2003, a spot of closet short-term market timing could pay off handsomely.
Three years at Wells Fargo
Effective from 9 December 2019
One firm with permission suspensions left
Continuing the Architas education series for clients.
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