A long with the sunshine there has to be a little rain some times

The term “stock market bubble” is currently being searched more often on Google Trends than almost at any time in the past 20 years. The main themes are excessive valuations and concern potential debt crises, which could lead to insolvency and financial instability, especially for countries with high debt-to-GDP ratios like the UK and the US. On Tuesday we saw the latest release of UK government borrowing, which was the highest for five years in September, as rising debt interest costs and higher welfare payments pushed the public finances deeper into the red. Tax, borrow, and spend is a well-worn path leading to economic misery.

The recent threat of new tariff wars with China added a little volatility, as did the collapse of First Group and Tricolour, which gave rise to comments from Jamie Dimon about Cockroaches in the system. Governor Andrew Bailey expressed the view that it’s an ‘open question’ if this is merely idiosyncratic or “the canary in the coalmine”. Thanks, Andrew. Both events had the potential to unsettle investor sentiment, which it did for about half a day.

Friends asking me how they can get themselves “safe” in the market, I assume, implying where to hide from the impending collapse. Reminds me of Dustin Hoffman in Marathon Man, as he was having his teeth seen to, whilst being asked if it was safe. So are all these doomsday fears justifiable? As one does these days, travelling from one spot to another, we find a podcast to listen to. One I find interesting from time to time is Morgan Stanley’s thoughts on the market, featuring Mike Wilson, the MS CIO. Here is the link https://open.spotify.com/episode/6db1KEAeZ2FQMqnjvwiBOi?si=7399f1bdaa444b20

You can listen; it’s not very long. In essence, the view is that a correction is almost inevitable—maybe soon rather than later, between 10% to 15%—but it provides another opportunity to fill your proverbial boots when it happens. He describes Liberation Day as better having been called capitulation day, the last piece of bad news for the economic cycle, which subsequently bottomed. Mr Wilson adds, something we highlighted in the past, that stocks are a hedge for inflation; higher inflation means higher earnings growth.

The risks he highlights for a correction are well known: an escalation in trade wars with China, which would be my N01 as we approach the November 1st date when tariffs could revert to Liberation Day levels if both leaders dig their heels in.

Another possible one, funding markets coming under further stress caused by ongoing Fed quantitative tightening, or thirdly, technical factors brought on by an overbought market. Mr Dimon’s cockroach reappears, or Mr Bailey’s canary keels over.

Bear markets usually occur ahead of an impending recession, and pullbacks when sentiment gets excessively bullish. At present, it’s hard to argue that point for either. A correction, I am sure, would be a welcome occurrence, but for now, markets seem happy to keep climbing that wall of worry. The reality is the world can’t afford a recession. The podcast ends with the advice keep your powder dry for the next great buying opportunity.