There is a bit of a phoney war in markets at the moment. There are a lot of worrying headlines which you might think would move markets more than momentarily. But they aren’t. The pivotal US stock market peaked on 13th August. Since then it is off just 1.7%, and the rest of the world’s stock markets, including the UK, are down roughly 3%.
Over in commodities, a source of chunky gains over the last couple of years, only oil shone, up 20%+. Everything else was down, including gold.
Longer dated government bond indices are typically off by 2-4%, including index-linked, despite inflationary pressure.
Overall, a bit dull. The risk now is that you drop your guard. That does appear to be what many UK-based investors are doing, with record amounts heading to the US stock market.
Trying not to do something stupid is preferable, which requires a context:
· On the one hand, if you don’t watch where you are walking on a cracked pavement you risk falling and breaking your wrist or ankle or both. Painful, but not terminal.
· On the other hand, if you don’t pay attention walking along a cliff top you risk very serious injury and death. You don’t recover quickly, or at all.
When investing you need to know if there are merely run-of-the-mill cracks in the market, in which case no need to panic. Or if the markets are on a precipice, in which case great care is required.
Thankfully you don’t have to guess on this, as there are many precedents through the rich history of financial markets which shine a bright light on where we are today. The precipice.
Markets play with your head in so many different ways.
In the short term, it all goes a bit quiet, some drift but nothing worse. You relax. You avert your gaze. Don’t.
In the long term, over many years stock markets can build a formidable wall of complacency. You have no visibility of what went before because your visibility is defined by your experience. You don’t see what went before.
Now you are at a point in your life cycle (at least I know many of you are) where you are most vulnerable financially. And the unhappy coincidence is that financial markets are now more vulnerable than…well…a time outside your life experience, and this is hidden behind that formidable wall of complacency…which also cocoons much of the investment industry.
It would be tragic if what has been called the luckiest generation, the Baby Boomers, lose their massive advantage through complacency, and, in some instances, a fog of denial.
Do you remember 2023? It was the most bizarre year in my investing experience. But let me go back to 2018 first...
I expressed the belief that when the 40 year cycle of falling inflation and interest rates came to an end there would be no one in the investment industry with any experience of a different era, making the transition from the old cycle to the new one particularly uncomfortable.
Then came 2023, which was a good example of one of these uncomfortable years. It wasn’t a terrible year for investing, with mixes of small losses and small gains. Nonetheless, the views expressed by some of the most accomplished individuals in financial markets were a mix of frustration and deep reflection. Many investors, fed by 40 years of easy gains, and goaded by stories of stupendous gains in the latest phase of the US mania, wanted to know why they weren’t in that crazy game – their sense of expectation had been four decades in the making.
One favourite quotation of the time was from Jonathan Ruffer, whose team managed £26 billion:
“The extraordinarily long bull market in equities has not prepared investors for the battles ahead…
…This is not an intellectual exercise, it is a battleground.”
And from another sober fund manager:
“Too many of the things which were meant to go down went up, and a few of the things which were meant to go up went down.”
As I said, the markets have many ways of playing with your head. Though Jonathan said that investing is no longer an intellectual exercise, but a battleground, I would say most of the time the battle is in your head.
After an excellent year for investment gains, until that S&P peak in August, the risk is that you (we) lose patience with a month or two of drift, expecting another year ahead of 20-30%, and do something stupid. Don’t.
Your state of mind is not helped by The Orange Maniac. That he has had a terrible couple of weeks brings the rest of us light relief. He is being smashed in the polls, and might lose both houses in the November Mid-Terms. He had to grovel to President Xi, and is still struggling to extract himself from a war entirely of his making in the Near East, the price of which is being paid by diesel users and farmers worldwide.
He has even been floored by the snails of West Clare, the “vertigo angustior” or narrow-mouthed whorl snail – but you knew that. In 2014 he promised to be a “friend to the snail” to get planning permission for his Doonbeg golf course. His new plan to build “the nicest ball room in the country” in Doonbeg has dragged him back into the sand dunes with the snails. The bats are having their say too, as they say they risk being “guillotined” by helicopter blades. A local publican suggested that the snails would be open to mediation. The bats have not commented on this possibility. No I didn’t make this up. It was the front page of the FT.