Equity markets continue to show remarkable resilience as the S&P 500 closes in on its all-time high again. The FTSE 100, as it has done for over a year now, trades in this 5% range between mid 6500's and low 6800's with every time it gets to the top end of that range traders look for the break-out and the bottom look for a break-down. We highlighted on the 6th August an article featured in the Evening Standard that suggested panic across the streets of the square mile as equity prices fell, the FTSE 100 was close to 6600 at that point. We went on to add that when articles like these appear we are mindful of the poor investor on the train home, who may be influenced by such headlines. Our view was rather than looking to sell, we looked upon articles such as these as a signal the correction was near to completion and now was a time to buy. It once again appears we were rather on the mark as the FTSE 100 has gained almost 2.5% in the past week or so, trading close to 6750 again.
We have stated in these blogs that we believe the likelihood of an interest rate rise in the UK was a more remote possibility than many economists anticipated. On Monday Citi, who had been forecasting the first rate rise in the UK for Q4 2014, announced that they now believe, post Mark Carney's comments last week, that the first rate rise will come in q1 2015. Citi have also pushed out the timing for when they expect rates to get to 2.5% from late 2015 to mid 2016.
It is probably worth pointing out a couple of pieces of research on Monday as they tie in to one another. The first from Henderson Global Investors, according to their report dividends in Europe grew by 18% in the second quarter of 2014, despite the sluggish outlook for economic growth in the region. Dividends from US companies grew over 10% in the second quarter. JP Morgan in their strategy report today address the question that a lot of investor caution is born out of the belief that bull markets tend only to last about 5 years and we are into our sixth. They argue that there remains some pretty good reasons why the bull market may have more legs as corporate balance sheets are extremely strong, cash is at a record high, coupled with net debt-to-equity ratios at record lows. These healthy dividend increases appear to be made from a position of corporate balance sheet strength.
It is also worth bearing in mind that both the stock market crashes of 2000 and 2007 came when interest rates had peaked not as we are now when the interest rate cycle was at the lows, and balance sheets were not in such good shape. It does seem that possibly the Evening Standard had forgotten these points when they suggested panic was hitting the streets of London.