Equity markets continued to be buoyed by the expectation of a deal between the Republicans and the Democrats to raise the debt ceiling. The deadline approaches of October 17th when some believe the US government will run out of money to pay its debts if no resolution is found. Equity markets have had a good run recently on the assumption a resolution is to be found, so there may be something of travel and arrive when the deal is eventually sealed, leading to the possibility of a modest correction. Buy on the rumour sell on the news is one of the great stock market adages. As of this morning the S&P 500 remains within a few points of its all time high. When you think of the recent events that could have shaken investor confidence it is quite surprising. It does stick in the back of my mind that the market selloff in 2011 came after an agreement had been reached but that was partly as a response to the downgrade of the US debt rating. So far there have been no real rumblings of a downgrade this time.
Overnight the Nobel Prize for economics was jointly awarded to three people. The point of interest about the award this time, is that at least two of three have very differing views on what drives markets. Eugene Fama is described today in the FT as the father of the efficient market hypothesis. Efficient market hypothesis implies that the market at any one moment in time reflects all the known information, and stocks are therefore always correctly priced at that moment in time. Mr Shiller, another of yesterday's winners, believes that psychology plays an important part in how markets behave. The third winner Professor Hansen is in the Shiller camp. There is plenty in the papers today about the work these three men have done to advance the development of investment tools. Gene Fama's work has been instrumental in the development of index trackers, claiming that fund managers cannot outperform the overall market. As my father pointed out to me as a young lad, it may be hard for a fund manager to outperform an index, but for a tracker it's impossible. Professor Shiller and his cyclically adjusted PE has been telling everyone the market is overpriced since 2009, so appears to have its flaws as well. After my own many years of deep study of markets I have come to the conclusion the route to success is buy low sell high! I wonder if that pearl of wisdom will get me a Nobel Prize. I thought I would add the chart of the Shiller PE