Correct me if I am wrong but wasn’t the US president recently impeached by the Congress? Admittedly he was acquitted by the US Upper House. But he was still impeached.
What about the handbags at ten paces between America and Iran? Weren’t we almost on the brink of a serious conflict between the two countries? And let’s not forget the Sino-US trade dispute. Has that even been remotely resolved yet?
From my vantage point, I still see a tremendous amount of uncertainty hanging over the markets. Consequently, economies and companies should still face unprecedented headwinds.
And the latest headwind, namely, the badly-handled virus outbreak that started in Wuhan could slow global economic growth even further….
…. China is now more connected with the rest of the world than during the SARS pandemic of 2003. So, any slowdown in China could have a much bigger impact on global economic growth today than SARS did then.
So, why are global markets behaving as though nothing has happened? Are investors simply rearranging deckchairs on the Titanic? Some experts are suggesting that they might be.
Apart from a momentary dip in global stock markets at the beginning of February, it appears to be business as usual for stock-market investors. They have even pushed shares on the US market to successive record highs.
The performance of global markets makes the cautionary words from Pimco sound more like scaremongering than sage advice….
…. the investment management firm said of the Wuhan virus: “It is big. It’s going to paralyse China. It’s going to cascade through the global economy”.
It added that we should try to resist our inclination to buy the dips. Furthermore, the money manager said it cannot be countered by central bank policy.
Pimco may well be proved right. But for now, nobody seems to be listening.
Pimco is correct that we should not be complacent. But it is probably underestimating the impact that central bank policies can have on stock markets.
Their concerted efforts to keep interest rates low, coupled with continually flooding the global economy with cash is distorting asset prices. Who would want to leave their money in the bank earning a pittance in interest?
Who would want to pile into bonds that charge lenders for lending their money? Who would want to buy property today when they are at sky-high prices?
So, the only remaining of the four traditional asset classes that makes financial sense is shares. But this is where we need to be extra careful. There is a chance that shares could crash….
…. but that is unlikely to happen unless bond yields exceed dividend yields….
….and that could happen if central banks should start raising interest rates, or if corporations should cut their dividends, or if too much cash should push share prices to even more astronomical levels.
As to when that might happen is anyone’s guess, which is why we should not be complacent when selecting shares to invest in. Just because a share is rising doesn’t necessarily make it a good share.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.