"Stock market bubbles have a solid base in reality but reality as distorted by misconception" George Soros

There was a little piece of good news regarding the UK economy on Tuesday as industrial and manufacturing production beat expectations for the month of August. Slightly less encouraging was the gap between exports and imports as our balance of trade was minus 5.6bn pounds in the three months up to August.

The IMF increased their forecasts for global growth this year and the next to 3.7% from 3.6%. They increased forecasts for most developed economies except for the UK economy. Maurice Obstfeld, the IMF chief economist commented on the position the Bank of England faces when it came to debating interest rate policy.  The Bank of England is in the difficult position of having to react to inflationary pressures which could have further negative impact on economic growth. With consumer spending under pressure, the recent rise in the oil price and signs of weaker economic growth this would traditionally not be a time to raise interest rates. History has shown there can be a negative loop to this scenario as interest rates rise, their government faces wage inflation pressures, this, in turn, puts further pressures on the economy and the need to raise rates again. The economy enters a period of stagflation.

There has been some speculation in the press that the Trump tax reform hopes may have taken a slight hit as a row continues to deepen between the president and Republican Senator Corker. Mr Corker accused the president of possibly setting the country onto a path that could lead to world war 3. If the Democrats fail to support tax reforms then Mr Trump will need all his Republican support to get the bill through. The decision to raise the budget ceiling was deferred to the end of the year, it could be that should the row grow within the Republican party this too could come back to investors radar.

The investment world looks a rosy place, economic growth, company profits growing, interest rates still low compared to history. What’s to worry about? The Economist highlighted that not only have stocks boomed but so has virtually every asset class. They trotted out the Cape Shiller adjusted price/earnings ratio showing extreme valuations in equity prices. This may be true but it has been like that for a while, and if an investor had followed steadfastly to that ratio they would have missed the last few years bull run. The go onto to give reasons why another asset class, houses are more expensive than compared to other times in history.

It is always hard to time the moment to get out on valuation as markets stay irrational for a lot longer than investors can stay solvent. However, we may offer one crumb of comfort for those who get the timing wrong but have the patience to wait. The FT pointed out today that if you had bought the S&P 500 at the height of the 2007 bull market and not panicked during the crash, by now you would have doubled your money.

Posted on October 10, 2017 .