When we make investment decisions we are meant to have a strong view and to back it. As a fund manager I used to present my performance and investment strategy to my clients who were the trustees of corporate pension funds and charities.
In those meetings I had to present a clear message in a confident manner – otherwise the client might start to harbour doubts as to whether I was on top of things and question if they should continue trusting me with their millions.
But it’s only occasionally that we see the future with such confidence; most of the time life and investing simply isn’t black and white. Rather it’s confusing, with many plausible outcomes. So we have to balance probabilities. We also have to reconcile the fact that our head and our gut instinct might be pulling us in opposite directions. Which is where I find myself at the moment.
That the equity market has had a great run isn’t in doubt. The stock market has compiled a firm uptrend combined with very low volatility. Amazingly there have been just two days this year when the FTSE All Share index has moved by as much as 1 per cent!
This low volatility uptrend has been even more impressive in the US and it has left Wall Street’s ‘fear gauge’, the VIX index, stuck at the lows. This isn’t a great sign because it suggests investors have become complacent and are prepared to sell put options on the index cheaply. Often something crops up to shake us out of our quiet reverie at times like this. In other words, my gut instinct tells me we are becoming overdue a bit of a shakeout.
But my head also has a view on this!
Equity returns over the last three years have been OK but nothing special. A glance at the longer term charts shows a picture of broad sideways moves followed by recent breakouts to the upside. Which is bullish! Wall Street is clearly excited about the new President and what that means for corporate taxation and economic growth. While in the UK our economy continues to perform, despite well-aired uncertainties. The aborted bid for Unilever also serves to remind us of the attractions of good quality UK-domiciled businesses during this time of sterling weakness. Valuations might have risen a little but they still look reasonable and could rise further.
So what ‘clear and confident’ message should I present at the moment? I’m going to follow my head and stick with the markets for the most part, respecting their momentum. But I’m also acknowledging my gut instinct and keeping a little cash in case we do get an overdue correction.