Merryn's Blog

Equity market strategists finally begin to know that they don’t know

You know something is up when the ultra-bulls and the extreme-bears start to agree. How is a contrarian supposed to feel?

One of the many things that the investment world is bad at is admitting what it doesn't know. Take the Great Depression. What caused it? Socit Gnrale's Dylan Grice has a list of possibilities. It might have been the stock market crash of 1929. Or perhaps it was something to do with there not being enough liquidity in the economy (5,000 banks failed in the US in 1932).

Or maybe it wasn't about the fall in liquidity after the crash. Maybe it was about the fact that there was too much liquidity before the crash: there was a huge run up in lending in the late part of the 1920s, so there had to be a round of deleveraging at some point.

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Or if it wasn't that, maybe it was the collapse in world trade, the total value of which utterly collapsed between 1929 and 1933 (from $5.3bn to $1.8bn).

This isn't, I'm afraid, a rhetorical question. The answer isn't set in stone and you could, if you could be bothered, find a room full of economists to argue any one of the four.

The truth, as Grice says, remains something of a mystery: we might know what happened but we don't know the causal relationships between all the factors. The same goes for the decline of Rome. Was it something to do with religion (Christianity brought too much patience and not enough passion)?

Was it internal strife too many generals fighting to be emperor? Was it the fiscal crisis? Or was it some crazy mixture of the lot? Here'sa link (thanks again to Grice) that pretty much sums up every possibility. The same is also true of most other tricky global crises. No one really knows how things (and economic things in particular) happen. They just do.

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Sadly looking into the future is even harder than looking into the past. With this we get to know all the factors and try and figure out which ones are important and which are not. Then we have to figure out what that important one will make happen. Most forecasters and equity market forecasters in particular have usually made a good stab of pretending they can do this.

But these days, I'm sensing a little humility creeping into the market. Why? Everyone is copping out and suggesting we flee to the same safe havens: shares in companies with strong balance sheets and generous and growing dividends. We've been suggesting these in MoneyWeek for ages and I wrote about the momentum behind them here last year (calling them the New Nifty Fifty or NNF) and last week.

But as John Authers points out in the FT, the consensus is now getting weird. The strategists at Soc Gen and the strategists at Goldman's are usually at loggerheads, the former being deeply bearish and the latter often appearing to live in some kind of crazy happy land where big banks make sense andequities always go up.

But this year they're both suggesting deep-value high-yielders. The strategy might well have some legs still in it, and at least holding these kinds of stock limits your downside in a bad year. But, like all things on which everyone agrees, it can make a contrarian feel really very nervous. Perhaps it is time to start buying financials?




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