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9th July 2019
Market Commentary July 2019

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It has always been the case that the stock market is highly emotional, frequently changing from periods of wild pessimism to extreme optimism. The last nine months have been a fine example of the extreme mood swings that the market is prone to, with wild pessimism accompanying the festive cheer and extreme optimism accompanying the summer lull. Yet as I’m sitting here watching the sun try to break through the clouds, I wonder whether the outlook for markets has got brighter or gloomier over the last few months.

Headlines such as ‘S&P 500 Posts Best First Half in 22 Years’ and ‘Nearly Everything’s Winning in 2019’ could lead one to feel especially contented about the outlook, and Mr Market has certainly taken this stance recently. Most markets have performed strongly this year but there is a polarisation in opinions about the state of the world. Bond markets are shouting recession, whilst equity investors continue to cling on to the increasingly aged bull market.

There are competing forces at work which make the outlook slightly murky, namely, a slowing global economy and because of this, central banks becoming ever more dovish with monetary policy. The mantra in the markets has always been ‘don’t fight the Fed’ and so equity markets ignore the weakening economic outlook and rejoice at the continuing era of cheap money.

However, there must come a point where economic reality catches up with equity markets and causes investors to shun equities. The question is when, though?

Economic growth has been mixed over the last ten years and there have been many times that people have called the end of the bull market. Each time they have been proved wrong; and usually this is because central banks intervene and calm markets with more QE, or talk of lower interest rates. This can’t go on forever as central banks clearly have a limit on how low interest rates can go. It is hard to call the end of the bull market, but we would speculate that we are probably closer to the end of the strong run than the start of it.

The economic outlook has certainly got gloomier in 2019 but – peculiarly – this has made investors more bullish on markets. Bond markets are correct in that the chances of a global recession are higher than they have been for a while. Equity investors are also correct that in the short-term, equities have become more attractive provided that interest rates are going to move lower. If the global economy does continue to slow, then this will have to catch up with equity markets at some point in the future.

As stewards of your capital, we like it when Mr Market is extremely optimistic or wildly pessimistic. It gives us the opportunities to generate performance by taking an objective view of the world when markets are taking a subjective view. Our current stance is that in the short-term, equity markets are likely to be underpinned by central bank intervention, but that over the next few months increasing concern over the global economy and Brexit will lead to volatility in the market. We will continue to take advantage of Mr Market.

You’ll be pleased to know that the sun has finally broken through the clouds in the centre of England and the UK market is up 60 points. Things are looking brighter. For today.