Autumn Thoughts
Author: Cathy Dixon, director Cunningham Coates
Last week both the UK stock market and the US reached their highest level since the end of April. The charts for the year resemble a rollercoaster ride, however, with steep falls and sharp rises and at present the charts appear to suggest it is poised to turn down again. However, markets are nothing if not unpredictable and it would be unwise to assume it will swoop down again. Traditionally Halloween has been a good buy signal, but rather in the way that “sell in May and go away” cannot be totally relied on - witness this year’s excellent performance over the summer months – such a market predictor may well prove unreliable. Turning back to historical records, since 1965 the All Share index has returned an average of over 13% between Halloween and May Day, compared with just 1.8% between May Day and Halloween. This probably has much to do with investor psychology: as the nights draw in, anxiety and depression increase and hence a reluctance to take on more risk ensues. Conversely, as the days lengthen and spirits rise in the spring, so does risk appetite (it is interesting to note in this context that April is one of the best performing months).
The fact that this year has not conformed to type should not come as a surprise. We have faced a myriad of exceptional circumstances: in the UK the political landscape has altered completely and we are facing one of the worst public sector deficits in living memory. This has turned much conventional thinking on its head: the difference in yield between gilts and equities has now reversed completely and we have seen an unprecedented rise in gilts and bonds as investors seek security, against such an uncertain backdrop. This has, of course, also been distorted by the advent of quantitative easing, which aims to inject liquidity into the banking system. We had been anticipating a further bout of quantitative easing in the UK (QE2), but last week’s stronger than expected economic growth figure, which at 0.8% for the third quarter was double expectations, has cast doubt that this will be implemented before the end of the year. There has also been talk lately of investors’ risk appetite returning as flows increase into equity funds, especially in the US, as investors anticipate a resumption of quantitative easing there in the very short term, with an announcement widely anticipated this week.
The much-anticipated spending review did not have as much of an impact as might have been expected. While many figures were bandied about, the implication of these is still being assessed; since the 20th of October, we have seen the market mark time, searching for direction. Even though it does not appear to be expensive, it may struggle to make progress from here in the short term as there are so many uncertainties both here and overseas. The message remains very much the same: quality stocks with an eye on total return and a preference for international exposure.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Cunningham Coates Stockbrokers.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority. Registered number 131816.