Having notched up eight successive years of gains since the dark days of spring 2009, stock markets continue to flirt with all-time highs. Rightly so; the world, in economic terms at least, is a better place. Employment prospects are bright, confidence surveys bubbling, global growth is on the up and monetary policy still hugely accommodative.
But the heady rise in stock markets, which we witnessed in the first three months of 2017, may be a distant memory as we head for the summer months. In the absence of new catalysts, it may be that markets become decidedly range-bound, compounded, in the UK at least, by the fatigued electorate facing yet another barrage of mudslinging by the major political parties.
The euphoria surrounding President Donald Trump’s reflationary policy has faded with his failure to secure healthcare reform. While plans to slash corporation tax have been announced, Wall Street’s underwhelming response to the lack of detail on fiscal policy mean that the much-hoped for boost to US economic growth is unlikely to set equity markets racing any time soon.
The fading of the Trump trade has a distinct whiff of ‘I told you so’ about it. Investors have distrusted the current leg of the bull market rally for some time now. While they have cash to invest, they sit nervously on the side lines, unwilling to commit at current levels.
But timing the stock markets, never an exact science in my view, is a dangerous exercise. And, as history shows, the majority who wait for a healthy correction are often disappointed.
Logically speaking, it is difficult to see why the more economically sensitive areas of the market – the mining companies, the engineers, and broadly speaking, financials – all areas to which I have exposure, should not continue to perform at a time when global growth is rising, and during a period where, I firmly believe, we have witnessed the end of the great bull market in bonds.
The recent corporate results season proved earnings, in all three sectors, are on track for a solid recovery. Balance sheets are repaired, cash returned to shareholders and margins, as one would expect from highly operationally geared businesses, restored.
Short term, there are reasons why stock markets could fall. A faster-than-expected rate hiking cycle. A resumption of dollar strength, acting as it most undoubtedly would, as a brake on global corporate profitability.
The fate of the UK consumer also looks as though it could be a cause for concern, with rising inflation eating into wage packets, eroding real wages… and with all the implications that could carry for domestically sensitive stocks. Don’t expect a rise in UK interest rates any time soon.
In the short term, the fortunes of UK equities will largely be determined by the path of sterling as Mrs May negotiates her way to a ‘hard’ or ‘soft’ Brexit. A stronger pound will, of course, have inevitable consequences for stocks within the internationally-focused FTSE 100 index, while bringing a reprieve for those more domestically orientated companies.
But irrespective of possible short-term inertia, the crux of the matter is this. As a long-term investor, fundamentals are improving, with higher earnings growth driving stock markets. If you could only make one decision over the next three years – to buy or to stay in cash – my view would be that it’s time to come off the fence and buy.