Financial markets are full of contradictions these days. Whilst fund flows during the past few weeks show that fund managers are piling back into equities, wealthy investors are doing the opposite and are raising cash levels. One striking example is famous investor Warren Buffett who is sitting on a huge $128bn cash pile at his company Berkshire Hathaway, citing “sky-high valuations” as the reason for his prudence. We are seeing record levels of insider selling (management selling shares they hold personally) at the same time as companies are buying back their own shares – buybacks at US companies are forecast to reach $670bn in 2019. We have seen stocks rise this year even as earnings have been falling and economic growth has been slowing.
Interest rates have been lowered in several countries despite unemployment falling to record lows and several stock markets have risen to record highs. Surveys show that consumers have record high confidence levels, whereas CEOs of companies have very low levels of confidence. The current state of affairs is very confusing if you choose to try and understand it.
There is a contrast between what stock markets are doing and what is actually happening in the real world. True, the US economy is ticking over, although claims of “Best Ever Economy” by Trump are false – GDP growth of 2% is decidedly average relative to history and very disappointing when you consider the amount of money that has been thrown at the economy via tax cuts and government spending. There was good news that both the UK and Germany narrowly avoided going into recession, but GDP growth in Japan and Germany was just 0.1% in the latest quarter, which is practically a rounding error away from contraction.
With the US stock market making record highs and European stocks hovering around their highest ever levels, you would expect things to be pretty great, wouldn’t you? Maybe investors are looking forward to a rosier future, but current valuations are so high that the future returns on US equities will likely be very low-to-negative, and several international institutions are warning that the world is slowing down further in terms of trade and economic activity.
According to the media, investors are focusing on ‘progress’ in trade talks. This is an almost daily theme that is trotted out by the White House to keep investor spirits alive and which has already added many points to market indices, without any tangible evidence of actual progress yet. Maybe investors are hanging on for that final pop in the market that will come when something concrete is finally revealed, as long as we don’t get a case of ‘buy the rumour and sell the news’. In any event, the recent bullish sentiment has certainly been getting stronger – investors are exhibiting signs of ‘Extreme Greed’ says CNN with its Fear and Greed Index. The economic outlook needs to improve soon because equity markets are already pricing in a lot of good news and investors should watch out for any reversal of the current bullish sentiment.
Richard McCreery is an independent investment advisor based just outside Monaco who has been advising HNW clients for over 20 years. RM Wealth Management Investment advice, research & analysis since 2003 (+33) 04 93 57 08 41 / 0617 411 561 email@example.com Regulated in France by the Association Nationale des Conseils Financiers (ANACOFI), registration N° E004136. ORIAS member 13000050. PHOTO: NYSE