Eeyore Gets Onto The Dance Floor

Following a house and home office move just over a month ago I am slowly surfacing from the many distractions and I am starting to think about investment again. The equity sell-off I expected hasn’t materialised and so it was with interest I read an upbeat assessment for global and UK equities in a trade magazine by Trevor Greetham of Royal London Asset Management. He countered the fears of the more bearish amongst us about the length of the bull market with the pithy remark that they don’t die of old age! However he did back up his observation with sound analysis.

He noted that inflation in recent years has run well ahead of interest rates. With sluggish economic growth and a recovery which central banks do not wish to derail, interest rate policy has been very dovish. Rising inflation and static interest rates are the perfect storm for cash whose value is eroded in real terms without the compensation of rising interest rates. The disincentive to hold cash which has been prevalent since the financial crash is very supportive for equities. It pays to stay invested Greetham concludes.

Greetham also argues correctly that none of the obvious triggers are evident to send equities into a tailspin. The economy is not overheating with excessive wage growth or consumer spending, there is no evidence of excessive valuations as in the dot com boom of the late 80s and early 1990s nor are there signs of excessive financial debt or a banking crisis as in 2008. Bank balance sheets and regulation are now stronger. Although there are political risks such as with North Korea, Greetham argued that the macro-economic fundamentals are supportive of equities. For example he showed graphs of the inverse of the US unemployment rate and global stock performance relative to bonds. The two charts were highly correlated. In other words when unemployment is falling equities do well.

It would be hard not to conclude that Greetham thinks we are in a Goldilocks phase of the economy, not too hot and not too cold. You might even conclude “this time is different,” although I must stress these words are mine not his. In the past other economists and investors have made the error in assuming that past excesses or flaws in the financial system have been cured, only to be disappointed. Greetham is certainly not saying that a crash can’t or won’t happen, just that he does not see an obvious trigger at this stage in the cycle, although he does expect a bumpy ride from political risk or hawkish central bank concerns.

I have no truck with Greetham’s fundamental arguments and conclusion. He presents a reasonable bullish case for equities and there is not much between us. However many of the new jobs created especially in the UK are poor quality and interest rate rises may shock markets as they did in 1994. Crucially though it is not really the fundamentals that concern me but the potential for irrational investor behaviour facing a “wall of worry” syndrome about ever climbing equity prices. An unexpected trigger could send everyone to head for the exit.

Finally I said above that the equity sell-off hasn’t materialised. I could have added the word “yet.” I sincerely hope for the sake of my clients that Greetham is right and I am wrong. We might then see two iconic pessimists Eeyore and Private Fraser from Dad’s Army both getting to the dance floor to do a tango.

The content of this blog is my own understanding of equity markets. My comments are intended as general commentary only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.