Storm clouds gathering as we leave the summer doldrums

Cathy Dixon

As we approach the end of the summer, global news appears to be getting worse: the threat of some kind of military action between the US and North Korea and closer to home the mixed messages and tales of division within the government regarding Brexit. With less than 20 months to go until the UK exits the European Union, talk of a transition period is now prevalent but until parliament reconvenes it is unlikely we will have more clarity. Elsewhere we are seeing civil unrest in the US – and a great deal of criticism of the President.

Meanwhile global stock markets (mostly) sail serenely on. Last week for the first time there were significant declines over the course of the week inspired by the escalation of tensions (and rhetoric) between Mr Trump and Kim Jong Un. This certainly has all the makings of a so called “black swan” (defined as improbable events which bring dire consequences) and yet by Friday the market was taking a much more sanguine view of the heightening tension. Indeed it is notable how much bad news has been absorbed by global stock markets which are ignoring periodic media predictions of a crash. There has been a sharp rise in investment in passive funds including record-breaking inflows into exchange traded funds in 2017, giving rise to fears that this tide of money is helping to inflate a bubble in the US stock market;. At the beginning of this month the S&P 500 index hit an all-time high – up 267 per cent from its post financial crisis low in March 2008.

Prior to the Brexit vote last June the widely held view was that the UK stock market would be adversely affected if we voted to leave, due principally to the uncertainty that was bound to follow. So far the market has actually risen strongly – even with the weakness last week the FTSE 100 is still almost 1000 points higher than on June 22nd 2016 (7309 compared with 6338). However, this is in sterling terms and it is worth noting that when viewed in either US$ or € terms the FTSE 100 has lagged its international peers significantly: in euro terms it is only marginally higher since the Brexit vote. This should offer some comfort: for overseas buyers - UK equities are surprisingly good value which could lead to greater scope for international takeovers. This possibility could go some way to explaining the continued strength of the UK markets.

However, this does not mean that this extraordinarily long bull market will continue indefinitely. There are a great many storm clouds gathering and we are currently in the summer doldrums with a lot of market players on holiday. Add to that the recent advent of a sell signal on the FTSE 100 at the end of June from one of the technical indicators (the IC/Coppock indicator) and it seems that there are reasons to be cautious as we approach the autumn. Sell in May and go away could yet have some truth in it.

Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, a trading name of Smith & Williamson Investment Management ( SWIM). This article 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 SWIM.

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