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Werthstein Index July – Endgame on the stock markets?

  • Trump’s trade war brings the end of the rally forward
  • Valerie Plagnol raises the related risk of a currency war
  • Stock market risks increase while expected returns are lower
  • Robert Halver remains optimistic because alternatives to stocks are still missing
  • Werthstein Index falls to 3.3 points in July
  • Some of our Zeitgeists earned double-digit percentage returns over the last 12 months

The global bull market in stocks, and the global economic recovery, are now well into their tenth year.  That’s already one of the longest upswings ever recorded. So it’s natural to want stronger evidence of why the bull market can continue, than one might have required earlier in the cycle. On the positive side, there is still quite a lot of slack left in the world economy, and global interest rates are still close to historic lows. But on the negative side, signs of inflation are finally starting to appear in the US, and in global commodity markets, and US monetary tightening is accelerating.

Mr Trump’s trade war brings the date forward
This suggests we are into the endgame of the long bull market for the economy and for stocks. That endgame could still run for a while, the global recovery can continue perhaps another 12-24 months or even slightly more before it hits capacity limits — but Mr Trump’s trade war tends to bring that date forward, since it makes it increasingly difficult to use spare capacity in one part of the world to ease bottlenecks elsewhere. And stock markets tend to move ahead of the economy.

The related risk of a currency war 
My colleague from the Werthstein institute Valerie Plagnol is focusing on the related risk of a currency war. This depends a lot on what China decides to do about the renminbi. They say they won’t use it as a weapon, but they also say that it is influenced by market forces, and those forces will tend to drive it down. So that is a potential risk point. Meanwhile, she adds that geopolitics are also a major factor ahead of the NATO gathering on July 11. Is Mr Trump using his aggressive tactics on trade to obtain some concessions on military spending? And what will be the outcome of the summit between Trump and Putin immediately after the NATO meeting? It all creates a difficult global atmosphere, so Valerie moves her vote for the Werthstein Index, on a scale from 1 (extremely negative) to 10 (extremely positive), down from 3 to 2.

Mounting risks, less expecting returns
Agreeing with Valerie, I think stock markets could be only a year or so away from their peak. And do you want to try to desperately stay fully invested for the final mile, even as risks mount and the potential amount of the remaining return gets less and less? That’s why I stick with my very cautious 1 as my vote for the Werthstein Index.

Where are the alternative to stocks?
This is the key question raised by my colleague in the institute, Robert Halver. Although he acknowledges the trade and political issues, he emphasises that the underlying world economy is still expanding and profits are still rising, even though the rate is slowing slightly. Moreover, interest rates are still ultra-low or negative in all major countries, and set to rise only slowly, and that poses investors the same dilemma they have been in throughout the rest of the bull market: bonds simply don’t offer an attractive alternative to stocks. So in Roberts’s view, liquidity will continue to flow into equities, supporting prices and extending the bull market, and outweighing the negative forces. That’s why he keeps his vote at a bullish 7.

The three ratings result in an average of 3.3 points for the Werthstein Index in July, down from 3.8 points in June. So the index reflects the rising risks on the stock market.

Zeitgeists as an alternative
Speaking of alternatives, our Zeitgeists won’t be wholly immune from broader market volatility, but they do have the potential for medium term outperformance. For example, the “fight against sugar” looks set to continue moving strongly ahead, and the trend towards electric mobility and autonomous driving should continue, despite the discussion about punitive tariffs on car imports. With our forward-looking trends, we have achieved some double-digit returns over the past twelve months. Take a look!

Yours
Giles Keating

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