Reasons to be cheerful?

This year has seen strong rises in most stock markets and previously I have commented that this seems mysterious given all the main risks remain unabated.

I have remained relatively pessimistic largely because of the evidence of company reports and the trend in profits, as well as some plain barmy pricing of new companies coming to market, which has all suggested a disconnection between market sentiment and valuation.

Recently, markets have reacted positively to economic news:

Growth in various major economies, low levels of unemployment, Brexit deferred, low inflation and so on.

Now I will always say that there is no connection in reality between news about economic data (which is often selective and misleading) and the likely long term valuation of investments. Chinese business confidence picking up is for example probably only due to a worried Chinese state pushing banks to lend heavily to the commercial sector!

Of course, real changes like say a US/China trade deal that reduces tariffs will be good for businesses and probably profits, dividends and share prices in selected business sectors. That is a concrete event, something ending with a decent outcome.

But one significant and real measure of secure economic growth is action by central banks to control it – putting up interest rates. That is not happening and in fact recent decisions suggest rate rises are being pushed back.

Retaining cash while markets keep rising requires an iron discipline. Remember that you have other money invested, so even if markets are not going to fall back, you will only miss out on returns on a portion of your funds. That cost is an insurance premium.

Personally, having lived through this sort of market valuation pattern at the turn of the Millennium, I am happy to buy insurance and keep plenty of cash ready for a sell off. I still think the probability remains on the balance of the known facts. New purchases might be made cautiously on the ‘drip feed’ basis, but I am not even contemplating that yet.