The big picture: visions of the 'Goldilocks' economy?

Stock markets are testing record highs once again after 2015 started with deflationary jitters. The driver isn't altogether 'search for yield' as an average 3.9 per cent on London equities is nearly twice that for US stocks, with that market on a high.

Variously, the positives have outweighed negatives, the highest-profile being can-kicking of debts between the EU and Greek government - at least containing that crisis for now.

Significantly, also, the US Federal Reserve has indicated it will stay flexible about interest rate rises, as if the first will not happen until later this year.

China has posted mixed signals with February factory activity at a four-month high, but export orders shrinking at their fastest rate in 20 months. Deflationary fears have somewhat abated with oil prices recovering to about $60 a barrel and no glaringly weak macroeconomic numbers lately.

So, despite various fears continuing, the horizon appears more like black clouds with silver linings than fog set in.

At the risk of mixing metaphors, investors probably sense this outlook is as good as it might get towards the coveted 'Goldilocks economy' - one that is not too hot or too cold. Inflation is low and there are pockets of economic growth, yet market-friendly monetary policy is needed to encourage it.

With zilch to negative returns from bonds, the dividend yield on equities is therefore seen as attractive and dependable. Until the risk-free rate of interest improves and/or unforeseen events knock company earnings off course, that generous dividend yield offered by London equities means there is a prop.

UK profit warnings recently at a six-year high

Formerly known as accountants/consultants Ernst & Young, the 'EY Group' reckons the UK's largest quoted companies issued more profit warnings during the fourth quarter of 2014 than any three-month period since the fourth quarter of 2008 - i.e. the depths of the financial crisis.

Mind how this kind of analysis can lag the business cycle and investors' anticipating events. If there was a disturbing aspect it was the seemingly wide uncertainties affecting firms - political, public policy-wise, and pricing - that could cast a pall.

A slowdown in emerging markets and currency translation factors are also involved. Regarding mid to small-cap firms, however, I continue to see a reporting theme generally 'in line with expectations'. Where this breaks down it tends to be sector/company specific, and overall doesn't appear enough to compromise dividends.

In the US, a majority of S&P 500-listed firms are guiding investors negatively, suggesting currency translation is set to hurt revenue growth by a few percentage points.

This will dampen first quarter 2015 reporting to some extent, but as with the UK it is more a feature of bigger international firms. The US remains strong in Nasdaq-listed technology plays.

Indeed, the upshot for stock-picking would appear to favour smaller growth companies - especially those with a radical technology - if the news from international and cyclical firms turns more negative. There is no convincing evidence as yet though.

Markets anticipated can-kicking with Greece

The stand-off between Greece and Germany raised angst that a Pandora's Box was about to be opened, with more southern European nations exposed to financial turbulence and unrest.

But investors maintained their poise with a cynical 'game theory' approach that EU creditors and the newly elected Greek idealists would be forced into compromise, neither side wanting to sacrifice Greece's eurozone membership.

Critical, also, has been the conflict in Ukraine: while Germany's finance ministry has made belligerent noises towards Greece, Germany's coalition government and especially its chancellor remain aware of the current imperative to keep Greece in the fold.

US diplomats have also been over to help negotiations, the Obama administration fearful of Greece lapsing into a Russian sphere of influence if outside the euro.

It remains to be seen whether Greece sticks to the terms of its €240 billion (£174.3 billion), four-month rescue package, but there is an ongoing political backstop here which gains strength the more awkward Russia proves with the West.

Deflationary worries have abated somewhat

They weighed on markets in the New Year, plunging oil prices being a lightning rod for fears of economic stagnation. Yet, Saudi Arabia's oil minister has lately cited oil demand picking up, despite analysts fretting that global supply continues to over-shoot.

Amid the contrasting signals, credit rating agency Moody's has cautioned that while the US will benefit from lower oil prices, they will not be enough to bolster global growth over the next two years amid a slowdown in the eurozone, China, Japan and Russia.

Forecasting oil will always be hazardous as mercurial geopolitics combine with the guesswork of global demand, but the deflationary frighteners have eased for now.

Regarding the UK economy, the British Bankers Association says demand for personal borrowing is at its highest levels in recent years. Interpret this as you will: a sign of improving confidence for this key segment of the economy, or more like a reverse to Britain's bad old ways of debt?

Whether wage increases will materialise in support of the extra debt remains to be seen. Mortgage approvals edged up in January, the first time since June 2014, although the rate was 26 per cent down year-on-year. Obviously the springtime housing market could be affected somewhat by May's general election.

'Crispin Odey fire and brimstone' deferred

2015 is therefore taking shape, plenty more robust than the warnings from this celebrity hedge fund manager I considered last month - concluding 'don't be swayed by this high roller'.

In fairness to Odey he reckons anyway we are looking at fog not contrasting clouds; that it is too early to decipher the inevitable downturn ahead. The crux of his equities shorting stance is conviction that a debt-bust will result from deflationary downturn spreading globally.

Call mine a wait-and-see stance, but I prefer to take my cue from the evidence emerging, which remains supportive of equity dividends. Institutional investors are not going to change their 'buy the dips' approach, however monumental a crisis. So continue to hold.

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