How nice of the Coalition to mark my son's 36th Birthday by holding the General Election that day. Wonder if he's opened the two bottles of Gran Reserva yet? Must have done if he's his father's son. But somehow only a couple of weeks since said Election the rest of us are suffering his hangover.
Despite the pundits, experts and pollsters getting the result badly wrong....again....and what appears to be a pro-business UK Government returned with a majority pessimists are out in force once more. Can you remember what investors are advised to do every May? You're supposed to panic and sell your shares, that's what. Remember? "Sell in May and don't come back 'til St Leger Day". For non-racing folks like me that's a horsey event named for some unknown reason after the patron saint of auditors. This year it's the 12th of September.
Every year we get the same headlines whether the previous period has been good or bad for equity investors. Let me take you back to the shaky days of May 2009. You've probably forgotten what it was like back then. The Financial Crisis of September the year before had almost brought the global banking system to its knees. Stockmarkets had crashed big style. In late February of 2009 I was the only person the Daily Telegraph could find who was daft enough to be optimistic that Stockmarkets were close to a bottom, giving at least seven good reasons why it was time to buy quality at bargain discount prices. Mind you it didn't go down well with their readers who said I should be locked up. Well I hope they locked up their money in loss making deposits. Last laugh and all that.
By the time we'd got to "Sell and Go Away Time" the FTSE had risen 20%. On the ninth of May '09 the Telegraph published a survey having asked 12 "experts" whether this was the beginning of a cycle of optimism (known as a Bull Market) or whether it was a false dawn or a trick for the unwary (known for some inexplicable reason as a Dead Cat bounce). Also for some unknown reason we qualified for inclusion. Six years later it's interesting to note we were one of only two convinced we were in a sustainable Bull market.
Two weeks later the Telegraph asked me to write a follow up to explain why I took a different view from the herd of pessimists unimpressed by recent stockmarket strength. I'd forgotten this piece but some kind soul in the US only the other day mentioned it on Twitter where I am a regular contributor. And in the piece I gave an example of pessimistic reporting taken from a summary of US financial woes in The Peking Review....
"Throughout the United States, from New York to Los Angeles....the picture is one of declining production, depressed markets, sharply rising unemployment, chaotic money markets and slumping stock exchanges. The country is in the grip of a deepening economic crisis, the worst since the Second World War."
Summed it up, eh? Or did it? That extract was printed on February 7th 1975, written funnily enough as the crisis of 1973/74 ended and just as the bull market of 1975 kicked off.
So what's happened since the first of May? Well as far as stockmarkets are concerned not a lot despite all the reasons not to be cheerful. If anything prices have risen a bit. But hang on Alan, what about Janet Yellen's comments? Janet is the Chair of the US Federal Reserve Bank, the biggest Central Bank in the world. It dictates interest rate policy. Janet's an expert. Only the other day she said the US stockmarket was overpriced. Various clever clogs say the same. But how accurate are their predictions likely to be? Janet included?
Hands up who remembers Alan Greenspan? In the 90s he was held in awe as the cleverest chap around. He was the Fed Chair long before Janet. In Dec 1996 he went further than Janet. He reckoned the US stockmarket then was suffering from "Irrational Exuberance" (a condition only pessimists recognise). Grossly overvalued in other words. At the time the NASDAQ Index stood at 1300. By the time the next stockmarket crash occurred in March 2000, a mere three years later, the NASDAQ reached 5132. The brightest man on the planet who was in control of Fed policies was over 300% and three years out.
Yesterday we had a visit from Neptune's (not the planet, the fund mgt group) two bright stars in US equities, Felix Wintle and James Hackman. The presentation got round to stockmarket value. Currently a tribe of pessimists called Market Analysts (the clue's in the first four letters of the second word) tell us stockmarket's are overvalued thanks to a US P/E Ratio of 18. Don't worry...it's something to do with Profits and Earnings that's all. Basically it's a Business equivalent of High Blood Pressure.
However a study of the past eleven stockmarket tops since 1960 shows so called danger levels of P/E's range from 9 to over 27. So it's not that simple then. What's Neptune's view? On the basis they see plenty value around plus no evidence of euphoria towards shares they're staying fully invested. Oh, one other thing courtesy of Neptune, going all the way back to 1929 the greater the number of closing day highs in an Index like the S&P500, the more likely we're in the middle of a multi-year Bull market....known as a Secular Bull. The good news is over the last 2 years there's been in excess of 100 days of closing highs. Now where have you seen that reported?
We have to be careful of being sucked into herd instinct. Following the investing herd is dangerous. The herd rushes to greedily buy just before a market top, and panic sells at a bottom. I don't see much evidence of the former. Meanwhile folks are still buying Government Bonds at almost zero returns, sticking to Deposits, and if they are attracted to stockmarket investments, since last summer they're piling into UK Index Trackers, sometimes called Passives. Why? Because they're told by today's grapevine, the media, you can't beat a Tracker, they're less risky, and as an added bonus they're as cheap as chips.
In theory it sounds good. In practice it's a different story. Did you know that one third of the UK FT All Share Index performance is down to only ten shares? And that half of overall performance down to only 20 shares. That's lower risk?
With headlines and the herd focussing on safety, caution and trackers the Law of Averages tells me the best returns will accrue elsewhere. You "herd" that here first. So have a great Summer, ignore the headlines, and enjoy the grape vines the way I'm going to over the next week.....wine tasting in Spain's Ribera Del Duero. Salud.