This chin is going to be tested….

Tuesday, 28th November 2017

This chin is going to be tested….

The stock market appears to have an iron chin….

Over the last decade the FTSE has done nothing but rise….

No blow has been sufficiently hefty to wobble it, wind it or retard its progress – let alone threaten to take its legs and put it on the canvas….

Yes, we’ve seen the usual short-term fluctuations in overall values….

But the general direction of travel has been up – relentless rising values with multiple new record highs set along the way….

  • No ordinary environment….

In an ordinary environment, you’d expect this kind of rising market to reflect a golden period of corporate success – a boom time for business across the board….

But the environment surrounding this rising market has been anything but ordinary….

A decade of unprecedented loose monetary policy – in the form of record-low interest rates and quantitative easing (money printing) – has flooded the markets with a tidal wave of new cash seeking out returns….

It is this deluge of capital – rather than any bottom-line corporate performance – that has fueled and driven the relentless upward trajectory of the market….

  • The Goliath of bull markets….

This has been the Goliath of bull markets….

Investors with money in the game have enjoyed a decade to go down in the ages. They’ve never had it so good….

Many expect the ride to continue – unimpeded and uninterrupted – up into the higher reaches of the stratosphere….

Maybe it will. Maybe there is further to go. But if that’s the case, the flip side is that there will be further to fall when the rocket fuel finally runs dry….

Sooner or later, all markets – even one such as this – must adjust to the real-time realities facing the businesses (specifically, realities related to their performance and prospects) that ultimately underpin market values….

At least that’s the way I see it….

And the signs are that the fight is getting tougher. We’re heading into the trenches. The blows are going to come thicker. They’re going to come faster. And they’re going to come harder.

In short, this market is approaching the point where its iron chin is going to get tested like it’s not been tested at any point since 2008….

  • Bad news….

As weeks of bad news go, last week was particularly bleak….

Forget the budget….

That was par for the course – the usual set-piece circus that sees a grinning Chancellor pose for the cameras with his red box before turning to the carefully prepared speech, the lame jokes, the well-fudged numbers and the baseless predictions that serve to paper over the cracks and present the best picture possible (however distant from the truth).

Instead, I’m talking about the numbers and the observations that emerge in the aftermath. The stuff that doesn’t tend to make it onto the front pages….

Like the observations made in the Freshly Squeezed report published last week by the Resolution Foundation….

For example, the observation that says Britain is on course for its longest period of falling living standards since records began back in the 1950s….

Or the one that says average wages in Britain will not return to their 2007 peak until 2025 (at the earliest) and that real household disposable incomes are set to fall for 19 successive quarters between 2015 and 2020 – an unprecedented figure….

Or the one that says productivity growth will amount to just 0.1% by the end of this year….

The last time Britain endured a decade of productivity growth this low we were neck-deep in the Napoleonic Wars…

  • And still more bad news….

And the Resolution Foundation is not just a single voice crying out prophecies of doom in the wilderness….

The Office for Budget Responsibility reports that GDP per head will be 3.5% lower in 2021 than was forecast less than two years ago….

And that average earnings in 2021 will be £1400 lower than was forecast in March 2016 – lower in real terms than they were back in 2008 before the financial crash.

A consumer confidence index produced by polling firm YouGov and the Centre for Economics and Business Research last week indicated that British households are at their least confident since immediately after last year’s Brexit vote.

Recent GDP figures have been propped up by consumer spending. But the Office for National Statistics last week warned that the economy’s reliance on consumption will not last….

John Hawksworth, chief economist at PwC, had this to say:

‘It seems consumers are still dipping further into debt to keep their spending growing by more than real disposable incomes. This rise in personal debt cannot continue forever, so consumer spending growth is likely to slow further next year.’

  • The money is drying up….

I should make it clear at this point that I am no economist….

I have no expertise to speak of and no professional credentials that qualify me to publish any final word on the subject….

I am a mere interested and independent observer. I have no great body of official data to dig into. And I wouldn’t know what to do with it if I had. I am a layman simply responding to what I see and hear….

And what I see and hear is quite clear-cut….

GDP – flatlining. Productivity – ditto. Wages – falling. Debt – increasing. Spending power – fast diminishing.

I don’t think you have to be an economist, an expert, a businessman or a brainbox to extrapolate a simple and straightforward conclusion from that specific set of ingredients….

Money is drying up. People have less of it than they did before. They will have less still going forward.

And money that people don’t have is money that can’t be spent….

  • Something must give….

Money is the lifeblood of any business. There isn’t a business in creation that doesn’t depend on money.

Businesses grow on the strength of the revenues they create and the profits they record. That’s the bottom line….

In an environment where consumers are feeling the pinch and have less money to spend, businesses inevitably feel the pinch too. They can’t avoid it. One thing follows the other….

Sales dry up. Revenues fall. Profits are harder to come by. Budgets are tightened. Development is harder to finance. Growth stagnates, drops-off or disappears altogether….

My point is this: do current market values – as reflected by stock prices – adequately reflect the gloomy economic climate currently besieging Britain?

Do current market values of listed companies – values close to a record high – appear in any way connected with the environment in which those companies are and will be operating for the foreseeable future?

Is the gloomy economic prognosis adequately priced-in?

I would argue no.

Of course, it might never get priced-in. The market might continue to grow despite the economy that supports it looking more and more like a dead man walking towards a recession….

Anything is possible. No scenario can be completely discounted. But I’m sure of one thing. The market’s iron-chin is going to be tested – and tested good.

Market valuations and economic realities are totally out of whack. At some point, something must give….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths