Stock markets are like a horror movie without the scary bits

There are some big stories in the market for sure.

US president Donald Trump and his issues with Syria and Korea, US tax plans, and also Brexit.

Then there are looming elections that could reshape the political landscape in Europe and, not least, the policies of global central banks.

Normally we should have volatility to match these stories but, in general, markets are calm. Dead calm.

The so-called Trump rally that pumped up so many growth stocks and stock markets has stalled and the markets are side-lining and directionless.

Surely some of the headlines should have caused more action?

Some commentators are

predicting a big stock correction but, being close to the markets on a daily basis, I see no evidence of that materialising.

The markets are just ranging.

So, is this a big scary market with major stories, none of which are deemed important enough to cause concern? The answer is yes, but why? Very low interest rates are the answer.

There are few sellers of this stock market and that is due to the structure of major money managers.

Most hedge funds who are the big money managers charge an annual commission. However, the big payoff for them comes from tapping the profits they make for their clients.

Hedge funds typically charge between 15% and 20%. The commission does not pay the bills — they need the profits to survive.

If you cash your clients in because you think the market is overdue a correction then you are shutting yourself out from any chance of getting a profit.

Interest rates are so low that the client earns nothing from deposits and neither do you.

To make an argument to withdraw your clients from the stock market, you need to be anticipating a 20% fall in prices followed by a multi-year recession.

I cannot see a story that sets up that scenario.

In fact, markets dropped about 15% in February last year due to a very low oil price.

That was a reasonable reaction because an oil price at $30 a barrel, if sustained, means some very big countries and companies are going to go bust.

Howeever, the oil price bounced and so did the stock markets, to all-time highs before April.

That lesson was well learned by many money managers.

As Warren Buffett famously said: “You can lose a lot more money sitting on the side waiting for a correction, than being in the market riding one out”.

But are traders being too blase?

Looking at some of the red tops, you would think we are on the brink of World War Three.

The markets analyse rationally, without bias or patriotism, and the odds of a global conflict are slim.

Gold is the big indicator of fear and it is lower now than when Mr Trump came to power.

It was a surprise how little the market moved when Mr Trump attacked Syria, which suggests there may be something else at play compared with the old days.

In the past, we would have had a bigger market reaction to such a geopolitical event.

I think technology in the market now plays a big part.

The analysis of any event is done over milliseconds compared to the hours of confusion taken in the past.

This goes a long way to smoothing out the volatility as the market can reach a conclusion much faster.

But there’s a story lurking on the horizon that may tip the balance and lead to concerted selling.

It isn’t Brexit or European elections — they are beaten dockets.

Yes, there could be a complete surprise we are not aware of.

The election of Mr Trump was a surprise — and the market rallied.

Many commentators find it difficult to understand how bored the market players are with Brexit.

That is because we see it is a multi-year event of ups and downs and market players are not going to react on every silly headline — which is exactly what the Greek debt story has become. The country will default in the end but market participants are not bothered by the headlines in the meantime.

The big, big story is when central bank policy shifts to higher interest rates. That applies to both the US and Europe.

US interest rates are still very low and European rates are at non-existent levels.

Will we see some inflation coming through? That would make me sit up and look at my investments.

There is no sign of that now or anytime this year.

But higher levels of bond rates are an alternative to stocks. Some analysts think we may be a decade away from an interest rate that beats inflation.

The market always retains the ability to surprise but right now I think the investing water is fine.

Peter Brown is investment adviser at Baggot Investment Partners. Baggot.ie


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