I WAS indulging in hand-wringing about soaring stock markets recently, warning that we could be getting too much of a good thing.
At the time the FTSE was in a bit of a dip, from which it has nicely recovered – this is fine, as I was not trying to call a market top, nor am I doing so now. But since I've arrived in the unusual position of being more cautious than the consensus m
any people have asked (kindly) if I am feeling OK.
For the record, I can tell those who think that past performance really is a guide to the future that when I have turned negative before, I have tended to be right in the end.
But what are the fundamental reasons for my caution, and what is the catalyst that would one day kill the bull market? The first is easier to answer than the second. Stock markets look set to sustain their rally into the year-end. Equities do not look egregiously over-valued (which shows you just how cheap they were when everyone hated them), the macro data generally supports the notion that we are over the worst, and good old peer pressure will continue to drive sceptical latecomers to buy equities so as to mitigate asset allocation embarrassment come the year-end.
I believe this to be true, but even as I write it starts to sound suspiciously consensus-hugging. There will come a point at which this once revolutionary but now orthodox view will defeat itself and markets will fall.
Let's think ahead to winter and next year. The general consumer mood is well reflected in retail sales, which look quite robust. As the year-end and the expiry of the VAT concession approaches, you might reasonable expect some acceleration in purchases. But the headwinds are getting stronger. If the VAT change does stimulate extra demand this year, then it will merely be stealing it from next. Stores may be able to report a good Christmas, but the January hangover will not be nice.
A year ago the oil price had fallen from $148 to $35; now, mystifyingly, it's $78 and fuel prices are already making strong men wince. A year ago variable mortgage rates were tumbling, considerably boosting net disposable incomes for a fair chunk of the population; not so now.
Let's look at it another way: if our problem was too much cash, too much liquidity and too much credit, then however much we smooth and soothe the adjustment we have to see a reduction in all three, which is exactly what the banking system is inflicting on us. This doesn't win bankers friends, but it is the right thing to be doing. So, either loans go bad and the banks suffer, or consumers cannot get credit and households suffer, or companies cannot finance their working capital and go bust.
Wherever it lands, there has to be pain; markets seem to think it will be acute, but I think it will be chronic. Wherever it lands, the economic effect at the macro level is the same – and it isn't good. Come the cold, wet, grey dawn of the new year with households feeling poorer, companies under even more pressure and bad debts rising, it's going to feel like the morning after some really big indiscretion.
That's my catalyst: when (rich) people with a habit book in to the Priory, they probably feel pretty chipper about the outlook. When they wake up on the first morning, I'll bet it feels downright grim. The rally may continue, despite looking tired this week. It's on borrowed time, though, and that grim awakening will come.
• Peter Bickley is director of economics at Tilney Private Wealth Management
