It’s probably time to start thinking about markets again.
We’ve had years of plenty. Since the lows of March 2009, where the FTSE fell below 4,000, we’ve had steady increase in its valuation.
And, ten years later, seven months from now, the UK will leave the European Union. What do markets think about that?
It’s a strange thought that there are people in work who started after the financial crisis of 2008. For them, the world has only become better.
For those of us who experienced the crisis, it seems like a long road to recovery and now we ask whether we’re going to encounter potholes, speedbumps – maybe a sinkhole or two. What’s going to happen?
Also, what tools do we have to look at what’s going on and what we can do about it?
For a start, too much information is probably a bad thing.
There’s a study by Paul Slovic looking at the relationship between information and effectiveness in decision making.
No information means you’re just taking a punt – your chances of success are pretty random.
Some information, say 5 -10 pieces, results in a decision that is sort of in sync when it comes to effectiveness and your confidence. Say you’re right 22% of the time based on this information and you’re 20% confident – that’s in line.
Much more information will not radically improve your hit rate – your accuracy. But it will dramatically increase your confidence.
And that’s a problem. More information may well make you more confident – but more because you look for information that confirms your biases than what is actually happening in reality.
I don’t really take in much news. On the rare occasions that I do, I’m not sure that I get anything more than a mass of conflicting opinions masquerading as fair and objective journalism.
Let’s go to where the truth is.
And the truth is in the markets. That’s where people show how they really feel about what’s going on.
Two countries, the U.S and the U.K are both pursuing isolationist policies. How are the markets taking it?
Well, the U.S appears to be taking it well. The S&P 500 is on a steady uptrend.
Perhaps the U.S is fundamentally sound. It’s the largest market in the world, with abundant and cheap natural resources. It’ll do just fine on its own.
The U.K is in a less fortunate position. It’s smaller, cannot dictate terms to its neighbours and can’t rely on support from China or further afield.
Its success depends on how well it negotiates and how well it engages with the rest of the world.
And the politicians so far appear to be doing a pretty poor job of it.
Or so the markets seem to suggest. The FTSE is heading down. Lots of euphoria in May, it seems, with a nice bull run, but since June that’s evaporated and we’re seeing a down trend.
I think this is something to watch carefully. It looks like things have turned.
And not for the better.
Personally, from an asset allocation point of view, I’ve ended up being quite UK light – around 8% in the UK actually and 82% U.S weighted with the rest scattered around the world.
I don’t see anything that’s going to make me change my mind yet.
I’m not looking forward to seven more months of this.