As investors we might reply to Seneca “give me friction, but not yet.” Since the early Noughties, notably in our TopFunds Guide, we highlighted not just the scope for “friction” when investing, but its random nature. To this day we repeat the same warning, which has never had more obvious relevance in my lifetime:
“If our parents or grandparents had invested early in the last century, could they really have guessed that their lives would be consumed by two World Wars, the Wall Street Crash, and the Great Depression? Sometimes fate is just going to deal you a tough hand.”
Twenty-five years ago people just thought we were being diligent and professional in setting this out so graphically. Now people read it and get a bit sweaty. Understandably.
For now, our road map, repeated last week, gives us comfort as events are unfolding much as laid out i.e. the US stock market has bounced to new highs, and most of the world’s financial markets have followed. If I am to put my head on the block, 7250 would be a neat peak for the S&P 500, though this is less than 2% from the level as I write.
Financial markets were largely calm over the last week. Midst a dangerous armed standoff in the Near East, that is surprising many analysts and commentators. Yet it is not a surprise if viewed through a lens constructed from a mix of ingredients: cycles, technical analysis, valuations, and behavioural tendencies. We cover these to some degree most weeks.
The behaviour of investors in the US market is particularly, and endlessly, fascinating. “Buy the dip” is not knee-jerk, it is religion. It is the behaviour of a crowd which worships the stock market. And it is typical end-of-cycle behaviour. War and peace come and go; investor behaviour does not change. The manic behaviour observed today is not a fine-tuning tool – it has been on and off for a number of years – but it informs us with some certainty where we are in the cycle for financial markets. And probably much more besides – politically, economically, socially.
Looking elsewhere, while Trump’s black comedy has grabbed all of the headlines, China has been very steady. It has achieved this without the anticipated reforms to encourage consumer and domestic demand, though this is now a declared priority, so expect developments any time. In addition, property market deterioration has slowed, and its technology leadership is accelerating. As the US persists with self-immolation, China is leading in those global sectors and asset classes least likely to be sucked into Trump’s black hole.
Beyond China, more domestically-focussed companies continue to have considerable valuation attractions, whether UK, Europe, or Japan. In each case the key is the trigger to unlock this value. Institutional investors around the globe, most still dangerously over-exposed to the US, keenly await such positive signals.
Rather grey UK economic news over the last week highlighted yet again why there is a desperate need for economic reform. Deflecting, and blaming Trump for a pre-existing problem, is simply not good enough. What could trigger that unlock?
Some modest, non-inflationary, reforms to aid growth could do it. Planning reform, tax stability, labour supply boosts such as incentives to work and improved childcare. Though none have a rapid impact on growth, they can quickly lift confidence and attract money from around the globe… if the reforms seem credible.
Leaning into the UKs credibility issue, an absence of political action on reforms in the next month will likely mean a new Prime Minister and new Chancellor in June.
Last but not least, in commodity markets uranium and oil were up 3-5% over the week, whereas gold and gold miners were down 1% and 5% respectively. Nothing unexpected here.