It is perhaps not terribly insightful to say there is a bullish outcome, a bearish outcome and somewhere in between. But there does seem to be a marked lack of consensus about where we go from here; 'here' being the FTSE 100 closing on 20 March above 7000 for the first time, having recently also surpassing its previous record of 6930 set on 30 December 1999.
But, with inflation having been 53 per cent since then, the Footsie would have to rise to close to 10600 to recapture its real (inflation-adjusted) level of end 1999.
At the same time, while just off their record lows, yields on gilts are still pretty unattractive, with the 10-year UK government bond paying just 1.6 per cent a year.
Not a matter of patience
The uncertainty about the outlook was brought home to me when listening to the Federal Reserve chair, Janet Yellen, in her recent, much-anticipated press conference.
In expectation of the Fed dropping the word 'patient' from its wording and thus implying US interest rates were going to rise sooner rather than later, the markets thought a rising dollar (and in the main a weakening euro) was a pretty sure bet. This had been troubling to equity markets as US earnings and possibly the US recovery might be threatened.
As it turned out while Yellen did drop the word 'patient', she also went out of her way to stress that this did not mean that the Fed was 'impatient'. And in fact the Fed's own forecasts for interest rates were lower than at the previous meeting.
Whilst press and commentators sought some clarity, the Fed chair would not be drawn further than saying that any interest rate decision would be 'data dependent', meaning that data on inflation and employment (wage growth) would be decisive. But where was this data pointing?
Here's the dilemma; while US employment data has been strong, this has yet to feed through into either higher inflation (which as a result of lower energy prices has been heading in the opposite direction) or much in the way of real wage growth.
Moreover, a stronger dollar was already acting as a potential break on economic activity (although exports are a relatively small contributor to US GDP) and overseas markets (particularly in Europe) were generally weak. If the chair of the Federal Reserve does not know how this is all going to pan out (or if she did she wasn't really saying), what chance is there for the rest of us?
The end of forward guidance
Equity markets took the Fed press conference positively (eventually when they thought they had worked out what Yellen meant), as the first rise in US interest rates was now thought more likely for September than April; hence the rally at the end of last week. But forward guidance (of data points that would trigger Fed action) seemed well and truly dead.
And those three outcomes? The bullish scenario is that while the US recovery is not too hot to cause an early interest rate rise, it is nicely simmering, enough to give the European economy, emboldened by quantitative easing, time to get its act together; with euro weakness encouraging exports and lower fuel prices giving a potential fillip to domestic demand, European equity markets have been roaring ahead.
It would work pretty satisfactorily if the European economy was beginning to gather pace just when the US needed some help.
On the other hand, in the bearish view, the US recovery could splutter to a halt (or the Fed could choke it off by raising rates too early), exposing the extent to which US equity valuations are stretched; the nascent European recovery (if in fact it has yet been born) could prove a mirage as consumers save instead of spend, given political unrest and a possible Greek exit from the euro.
This is not to mention our own little local difficulty, of a very uncertain election outcome on 7 May, not that far away now.
And the third way? Well, we stay much as we have been for a while now, as low interest rates provide some support for equites, but the global economy has not got the oomph to break out of its current slow growth phase.
Like the Fed, at IpsoFacto we are data-dependent in our analysis; we look at the relative returns of the different asset classes, risk-adjusted. Having this quantitative approach is especially important in the current uncertain climate. At the beginning of the year we reduced our bond allocation in favour of cash, but still have the majority of our exposure (70 per cent) in equities.
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