Are markets too sanguine as they trade the storms?

Bob Hair on climbing a wall of worry… yet again

Investment professionals have fantastic ways of describing how they feel about financial markets. When markets go down the talk is of “catching a falling knife” and when they go up we “climb a wall of worry”.

We invest for the long term, which history tells us is a sensible thing to do, but worry about the here and now. So where are we now?

Well, there are some headwinds, such as Brexit uncertainty, the tail risk that President Erdogan decides to renege on Turkish national debt, and the threat of price inflation continuing to outpace wage growth.

In the United States, the S&P 500 increased by 33.5 per cent in 2016 as the market anticipated President Trump’s promises such as lower corporate taxes and huge internal spending.

It remains to be seen whether President Trump can deliver on his preelection promises.

As far as tailwinds are concerned, in the United Kingdom, inflation may have peaked, public sector pay caps are being lifted, the employment rate in the UK sits at record highs of 75.1 per cent and UK average weekly earnings picked up to +2.1 per cent year-on-year to August 2017.

In the eurozone, the unemployment rate remains at its lowest level since February 2009 and economic confidence, business climate, industrial, consumer and services confidence are high.

Improvements in economic activity and undervalued currency and equity markets are expected to be positive for Europe.

In the US, recent employment gains and wage growth disappointed a little, and inflation has been weaker than widely expected.

In Asia Pacific and Emerging Markets, modest but synchronised global growth and a pick-up in global trade should be helpful.

Particularly as headwinds facing the US dollar appear to be fading.

With global markets continuing to track upwards despite some headwinds, we have something new to worry about – are markets too sanguine?

Whether they are or not, one thing is for certain – here we are climbing a wall of worry yet again.

However, over the longer term, taking risk has tended to be rewarding for patient investors, and it certainly has been over the last five years.

Taking risk has tended to be rewarding for patient investors