Such periods feel uncomfortable, however, we must remember that volatility is the friend of long-term investors and can provide excellent opportunities. Under such conditions, it is surprising that stock markets in London and New York finished August broadly flat in spite of some nervy days. Markets remain underpinned by lose monetary policy from all of the major central banks and the overwhelming consensus assumption that the global economy remains in robust yet not extraordinary health. It seems that there remains plenty of demand for perceived lower risk assets, thus supporting share prices of favoured blue chip companies on high multiples and sovereign bonds on minimal yields.
It is notable that bond yields have begun to fall (thus bond prices increased) from mid-summer, a similar point at which commodity prices started to rally strongly. The fall in bond yields would traditionally be seen as a negative sign for the economy, reflecting expectations of lower growth and inflation. Conversely, commodities are the raw material for industrial growth (particularly Chinese building work), with advances such as we have seen in iron ore and copper prices in August usually being associated with better times ahead. Of course, history never repeats itself and there are plenty of other factors at play here, the weaker dollar for one, but it is a puzzling development that I am keeping an eye on.
The overall flow of economic data that we see continues to affirm the consensus view of a relatively healthy economic picture – latest US GDP figures were better than expected and credit markets remain accommodative. Potential canaries in the mine that we have spotted more recently include falling auto sales in both the US and UK, falling UK house prices and a number of high-profile profit warnings (namely Provident Financial and WPP). Individually, these have not been sufficient to spook markets, but they do give us cause for caution, particularly given currently high valuations and the thin margin of error this leaves for investors. The current environment appears a difficult starting point for central bankers to embark on tighter monetary policies.
