With so many cross-currents it is even more difficult than usual to reconcile the two viewpoints of the typical investor – cautious optimism. This is well illustrated in these two charts from the last teleconference for Gold Members.
Anomaly 1 – buy the UK?
The JOHCM UK Equity Income fund was launched in 2004. Two-thirds of total return has come from dividend re-investment, just as we might expect. It is a rule that in the long run stock/fund prices will rise in line with dividend payouts.
Chart 1 below shows that this rule has broken down, at least in the short term, which it does from time to time. The dividend payout has keep growing (orange line) but the fund price has been going sideways and down.
This anomaly can be resolved in two ways:
If the former, there is 25% upside to close the gap (though the market can move rapidly from day to day, so do update this for yourself by looking at the latest JOHCM fund price).
Anomaly 2 – sell everything???
We can say that another rule is that, in the longer term, the stock market and company profits should go up together.
Well, have a look at chart 2. The blue line is the US stock market, the orange line is company profits. Hmmm.
You guessed it, there are only two ways in which this can be resolved. One is that company profits in the US take off like a train – very very unlikely. This is already one of the longest periods of economic recovery (from 2009) on record – as well as being the most anaemic, despite extraordinary and unique stimulus from negligible interest rates and QE.
On the other hand, the market must fall very sharply to close this gap. Where the US goes, we all follow.
These two charts are rather good at highlighting the reasoning behind my personal approach as set out in the last teleconference.
Chart 1 – Buy the UK?
Chart 2 - S&P500 vs. Corporate Profits