Where’s Santa when you need him?

After months of bleating from yours truly about the impending stock market crash, it seems that the business newspapers and financial press have finally caught up with what the City has been predicting for some time. This comes as no surprise to me as the financial news is always at least 3 months behind the true economic picture and at least 6 months behind the true stock market picture. This is just the way it is and has been for as long as I can remember.

And even if at times it can be quite frustrating it’s also completely understandable. That’s because not only do financial articles often use data which is at least a few months old (e.g. corporate earnings even when they are just released are based on historical data), but moreover they are written with the end-reader in mind. That is to say that the tonality of the news-report will usually reflect the sentiment of the majority of society. So, if most of the investors are not panicking and are happy with the state of the market, it would have to take one very brave editor to be posting things about doom and gloom.

Thankfully I am not a newspaper editor as I would almost certainly be out of a job by now. That’s because I would feel compelled to write what I believed to be true, not what would appease my readers. Ultimately, I believe that this is what readers want to know – the truth.

Therefore, I am quite delighted that (most) newspapers seem to be focussing on what is really happening out there – a collapse in investor confidence which has brought with it a 10% correction in equity prices.  In other words, the realisation of a stock market crash is now dawning upon more than just a few cautious people; it is now filtering through into the masses.

That can only be good news for everybody as it means that we are all on the same page. It’s the same type of realisation that occurred in 2008 and the dot-com crash of 2000. Indeed, it is the same pre-cursor to every major crash since records began. At first the staunch bulls are in denial, angered even of the mere mention of a market correction, then there is surprise when the market does continue to fall, and eventually there is an almost unspoken acceptance. That’s what I am seeing right now.

What’s changed?

So, what has suddenly changed such that we now find ourselves in a situation where nearly all but the most optimistic of investors, are concerned that 2019 will be challenging for equity prices? Has something changed that we have all missed?

The answer is no, nothing has changed fundamentally. In fact, there is little difference to the level of negative news that we are seeing now to what we saw a few months ago. The reason for the shift in mentality is simply one of perception.

Six months ago, one would have shaken off the news that Trump was waging a trade war with China as another one of his thoughtless mind games. Today however this same piece of news has a completely different impact on the market and share prices. That’s because investors can see that as the end of the year fast approaches, that their portfolios are worth considerably less than what they are at the start of the year. In fact, most investors are now either in negative territory or with very small gains, despite a strong start to the year.

That kind of end-of-year analysis is pretty hard to deny and investors aren’t stupid. Whatever their advisors and managers may tell them about the market, the numbers don’t lie.

And this is why I believe that investors are now making their voices heard – they are either selling and going into cash or bonds, or they are restructuring their shares into ‘lower risk’ sectors or strategies. This is all a far cry from earlier this year where there was a genuine tug-of-war between the bulls (optimists) and the bears (pessimists) – unfortunately you earn no points from guessing which side of that rope that I was pulling on. However, and unless there is some miraculous economic recovery around the corner that everybody has somehow missed, that game is now truly over. The red team win and the blue team lose.

FTSE100 decline

It was also only last week that we witnessed yet a further demise of some of our biggest and most traditional FTSE 100 heavyweights, including Tesco, Persimmon, Taylor Wimpey, Next, and M&S as they led the downward charge. This has helped to drive up dividend yields to levels which can only now be described as either ‘amazing’ or ‘unsustainable’ depending on who are you speaking to. (By the way, I don’t think that they are amazing).

But despite all of the bad news we shouldn’t be scared of what is likely to take place. Sure, we will get a market correction, a full-blown crash even, but that’s normal, in fact it’s actually not only healthy but essential for the long-term survival of the market. And the reason it shouldn’t worry you is because you still have time to do something about it.

Take a look at the US Federal Reserve for example. Back in June 2006 the Fed raised interest rates for the 17th consecutive time. Imagine that – 17 times, one after the other, where they raised interest rates.

Fast forward 12 years and the Fed was intending to follow a similar course of rate hikes.

That was of course before inflation weakened, oil prices nose-dived, stock markets collapsed, and global expansion came to a grinding halt. It’s safe to say that interest rates will probably still go up next year but I would be very surprised if they go up 3 times, as had been widely expected, up until just a few weeks ago. The point is that if the biggest central bank in the world is sitting up and recognising the danger, then it’s time for everybody else to do the same.

But of course, it’s not just the US. The Euro STOXX 600 index is now on course to lose a staggering 10% in this quarter alone, and with Brexit woes still far from resolved, the UK is not likely to fare much better. The European Central Bank (ECB) has also wisely cut its economic growth forecast as a result of the market turmoil so it really is time to be honest and say there is a tunnel but no light to speak of just yet.

Finland bucking the trend but for how long?

Even the small pockets of success that we hear about such as Finland’s ability for the first time in 10 years to reduce its debt (it’s still 105 billion euros), is not without its problems. Whilst the Finnish economy has done relatively well against many of its European counterparts in growing by a respectable 3% this year, the country’s employment rate of 70% and GDP is on shaky grounds and set to slow next year. Even the respectable debt to GDP ratio of 60% is likely to be challenged as growth declines at a faster rate than borrowing requirements.

And unlike the good old days, where one could look across to China for help, there appears to be nothing positive emanating from that corner of the globe either. Weak Chinese data including the lowest pace of retail sales in the region since 2003 and the weakest industrial output numbers for nearly 3 years, suggests China will be having its very own recession landing in the not so distant future. Whether that landing will be soft or hard is yet to be seen.

All of that said, we are still in this festive time of year and despite my severe reservations about the stock market and all that goes with it, I can’t help but think that the so-called ‘Santa Claus rally’ may still make a shock, late appearance this year. Typically, the global stock markets enjoy a strong period of growth over the Christmas and New Year period, which is prelude to an even bigger rise over the subsequent period known as the ‘January effect’.

I can’t be sure whether it will or won’t happen this year but for sure if there was ever time that Santa was needed for a little moral support, it would be right about now.

If next week’s article does not reach you before the big day itself, may I take this opportunity to wish you and your family a wonderful Christmas. May it be full of fun, joy and laughter.

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