Meaning from mixed messages

Dan Mikulskis


“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
Charles Dickens, A Tale of Two Cities

Markets are hard to interpret at the best of times, and these are not the best of times. Some things you can explain, some you can’t, and some are just weird. Fans of clean narrative and clear cause and effect ought to stick to physics or engineering.

Today’s markets are full of mixed messages. We have the rare occurrence of the US stock market yielding more than the 10-year treasury, while simultaneously close to an all-time high. Overall price-earnings ratios are higher than at any time since the dot-com era, but the dispersion underneath is the highest it’s been for 20 years. Corporate bond markets on the face of it imply easy conditions – a world away from stress and recession, yet the economy feels somewhat precariously poised in a recovery that is far from secure with many underlying weaknesses and fragility (such as £6bn of rent arrears on the UK high street, soaring energy prices, and global supply-chain pressures). Many areas are still relying on government support despite the apparent strength on the surface. Inflation stalks both the US and the UK while interest rates remain low, indicating a continued period of emergency supportive monetary conditions. Government deficits in the developed world have ballooned, with borrowing hitting post-war highs, while at the same time a fifth of all debt has a negative yield (including plenty of corporate debt).

Turning points

As John Authers of Bloomberg has been reminding regular readers of his column, this August marked significant anniversaries of two market turning points. It marked 10 years since (arguably) the final bottom before the end of the global financial crisis, and where markets finally abandoned the prospect of higher inflation, ushering in a decade of continued ultra-low interest rates and the ‘inflation is dead’ narrative. It also marked 50 years since Nixon’s shock announcement which ended the era of the gold standard that had prevailed since just after the second world war. A reminder that markets do undergo significant shifts from one regime to another, but sometimes the turning point is only really clear after the fact.

Reality is messy and often resists the attempts of bulls or bears to pull out clear narratives. It’s almost as if things aren’t always black and white.

Investors, as ever, are left to balance holding true to timeless market wisdom while adjusting for new market dynamics in an ever-changing world and drawing out the meaning from the mixed messages.

This edition of Vista reflects that divide:

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