As far as we can see
07 May, 2015
Winston Churchill said "it is always wise to look ahead, but difficult to look further than you can see".
Markets have been looking ahead for a long time now, and the second-guessing, predicting and forecasting has gathered pace recently because some in the market think they can see change coming and want to prepare accordingly.
The problem is, it is indeed difficult looking further than we can see, and our past experiences haven't offered much guidance either. The more we look ahead and fail to find any answers or clear signposts, the more we are inclined to retreat to safety until our vision improves. Hence the head scratching when the popular investment bets of the first three months turned upside down during April, and the sharp price reactions to those companies that fell short of earnings projections, and the handful of client phone calls asking whether it's time to change portfolios "just in case".
It's not as if markets have been entirely transparent and predictable - they never are - but you have to admit that things had been broadly tracking in the right direction so we had at least a degree of visibility. We knew that with interest rates remaining low and central banks intent on keeping economies growing, world share markets would be supported; as long as companies generated profits, then we would be rewarded through share price growth and increasing dividends. It hasn't felt risky or too much of a leap to assume that shares would continue to give us attractive returns. It has been pretty much a no-brainer to invest in the US since its economy has been improving by the month, whereas Europe clearly had a way to go.
But then a few things went awry last month; just enough to put the wind up investors.
Why did Europe suddenly become more popular than the US resulting in both European shares and currency beating their American counterparts in April? Why did the oil price soar 25% after declining 11% in the first three months of the year? Why did market darling Twitter, whose share price had rallied 40% in the first quarter, tumble 22% in April on revenue of $US436 million compared with the expected $US456 million? And why did yields of German government bonds bounce higher after approaching zero earlier in the month? These things didn't make sense and didn't align with what markets were expecting, so their immediate reaction was to retreat and wait for clearer signposts.
Maybe it was less about looking ahead and more about looking down.
You see, some markets and stocks had reached record high levels in April. The NASDAQ index set a new record after basically doing nothing for fifteen years since the tech boom and bust. Markets were already considered reasonably fully priced after the run we've enjoyed for several years. So maybe investors became fearful because they are afraid of heights? When you're up in the giddy heights it is easy to become well, giddy.
But while it is reasonable to feel scared if you are on a really tall ledge without a railing, it is less reasonable to fear a fall in financial markets from record highs. Markets are not subject to the laws of physics, and what goes up does not have to come right down again. Indeed if we are not careful, we could allow our fear or our desire to look further than we can actually see, destabilise our long term investment plans and make us miss our investment goals.
There were some odd things that happened during April, but fundamentals remain positive and there's no need to change our longer term expectations.
The view, as far as we can see, is still an attractive one.