Hares and Bears
Amid all of the market noise, do not be suckered into believing the bears who are always in the majority for reasons of self-preservation, warns Rowan Dartington Signature’s Guy Stephens
Last week was quite something for market noise and we consequently saw gyrations in equity markets of over 1% in the major indices, although they finished flat on the week.
Kicking the week off was the endless analysis of the first US Presidential debate which appears to have been ‘won’ by Hillary Clinton or more likely ‘lost’ by Donald Trump.
The key soundbite appears to have been the apparent hypocrisy surrounding Trump’s tax returns where it would now appear that he hasn’t paid any since 1995, despite previously declaring he would introduce policies to clamp down on tax avoidance.
Needless to say, the Democrats have seized on this as a ‘bombshell’ moment and it does serve to illustrate how vulnerable Trump probably is. This has helped support markets as this should serve to widen Clinton’s lead and is the market friendly outcome. Only another five weeks to go with the next debate this Sunday with Nigel Farage rumoured to be in attendance.
Just as we were getting bored with that, the rumour mill started again regarding Deutsche Bank’s stability, which has been an ongoing saga for some time. This was brought to a head following the US Justice Department imposing a fine the week before.
This didn’t really particularly register with the markets until Wednesday when Angela Merkel made the unprompted comment that there would be no state support for the bank. Whilst we know that she would face difficultly in doing so having been so tough on the Italian banks, definitively informing the markets of this caused significant consternation, an obvious comparison to
Lehman’s and caused some investors to withdraw capital, thereby increasing the likelihood of the rumour becoming reality. The share price tanked but has now recovered as German big business has repaired the damage with supportive comments whilst Ms Merkel is probably regretting opening her mouth. There is also always Mario Draghi to fall back on with his promise ‘to do whatever it takes’ to ensure Eurozone financial stability but he must be rolling his eyes skyward.
Next up was OPEC which appears to have agreed a production cut but with the caveat that there is not yet any agreement as to who will take on the burden. There was initially a rally in the oil price on the news as this is the first time there has been any supply discussion and agreement since OPEC stepped back from being the swing producer in November 2014, leading to a collapse in the oil price of more than 50% over the next two years.
Oil stocks rallied sharply but have now retraced some of the excitement because OPEC members have a history of breaching their quotas and over-producing so any agreement without clarity on burden-sharing is rather hollow to say the least. It is quite likely that even if they agree to cut say 750,000 barrels a day, then Russia or Iran will steam in and take up the slack. Also, the upside on the oil price is now capped by the US shale producers who become profitable once more at around $55-$60 and are waiting in the wings to start producing again.
Probably the best news last week was the upward revisions in the Q2 final GDP figures for both the US and the UK. Whilst the former makes a December rate hike more likely and the latter confounds the Brexit bears, both illustrate that, for now, consumer confidence is strong and employment is robust. This week sees more PMI statistics and then US payrolls on Friday which will provide an important insight into the health of the economic heartbeat in the West.
There are lots of investors with cash on the side-lines at the moment, waiting for a cheaper entry point which is failing to transpire. With the wall of worry quite high at the moment, the resilience of the equity market is remarkable. All markets look expensive, probably due to there being so much liquidity in the system with equity markets being the key conduit for earnings growth and income need. It is little wonder that valuations aren’t even higher and that presents a dilemma.
How long will the encashed investor sit on the side-lines, earning nothing, extolling a bearish scenario, talking his own book, keeping his fingers crossed? At some point, as the cash position costs upside performance, capitulation takes over as it becomes too painful and the investor decides he is wrong.
The FTSE-100 is poised to break through 7,000 once more which will hit the headlines and could even threaten to break new ground which will really get the hares and bears running. I can hear echoes of Alan Greenspan’s Irrational Exuberance speech of December 1996 when he effectively warned that the equity market might be overvalued.
Needless to say, the S&P 500 dipped a little on that speech and then peaked nearly four years later having subsequently risen by over 140%. Equity investing is a long-term game and trying too hard to predict the immediate short-term is a mug’s game.
Negative comment always makes the headlines and no-one loses their job for being wrong on the downside as the consequence is that the majority make money. Being wrong on the upside is to be avoided at all costs as investors are considerably more sensitive to losses realised than profits foregone. Be careful not to be suckered into believing the bears who are always in the majority for reasons of self-preservation.