Here is a list of things we are pretty sure of. Valuations of almost all assets are expensive by historical standards. The shrinking of central-bank balance sheets matters: if quantitative easing (QE) pushed markets up, quantitative tightening (QT) will surely bring them down. Full employment will eventually lead to inflation. Peak social media – something that, alongside Trump’s hostility to the likes of Google, has to have implications for the stock prices of the tech darlings – is almost upon us. And markets can’t ignore politics forever: unrest in Italy, Sweden and Germany matters.
Here is another list of things we are also fairly sure of. You can ignore politics for a very long time: as Adam Smith noted, it takes “a great deal of ruin” to damage the systems of a secure nation. Some valuations are actually cheaper than they were a few years back (rising profits in the US have meant falling p/e ratios). One should be careful of predicting disaster more often than absolutely necessary. Inflation doesn’t necessarily bother bull markets until it hits 4%-plus. And finally, all bull markets always go on longer than anyone rational thinks they should.
Add all that up and what do you get? In our cover story, Matthew Partridge looks at the US economy and stockmarket with a view to answering that very question. His answer (in a nutshell): a bull market that can go on for a bit longer. I asked Andrew Milligan, chief strategist at Aberdeen Standard Life, the same question when he kindly appeared on MoneyWeek’s (sold out!) Edinburgh Fringe show at Adam Smith’s newly refurbished Edinburgh residence, Panmure House, last week (Smith died there in 1790). His answer was similar. All bull markets are more or less the same, he said. Investing legend John Templeton divided their progress into four stages. They are, as all regular MoneyWeek readers will know by now, “born on pessimism, grown on scepticism, mature on optimism, and die on euphoria”. The key to success is just to figure out where you are in the cycle – and there is a strong chance we aren’t much out of the second stage. Euphoria (or “melt up”) is therefore likely to be on the way. Hooray (assuming he is right…).
Matthew suggests mitigating some of the risk in assuming the best is yet to come by moving into value stocks and, in particular, into Japan. I’m with him on this and in particular am with him on the value bit (these are the stocks that gained least from QE so are least likely to be hurt by QT). But I would like to add one investment trust suggestion of my own to the mix. The British Empire Trust, run by Joe Bauernfreund, focuses on investing in companies where share prices stand at a discount to their estimated underlying net asset value. Around 20% of the portfolio is also currently in Japan. How’s that for two birds with one stone?