History a window on the future

Ahead of the next meeting of the Federal Reserve monetary policy meeting, the economic picture is becoming a little murkier for the Federal Reserve. Consumer confidence remains resilient, partly probably as a result of strong stock markets helping family balance sheets. Yet, yesterday’s retail sales data indicated a slowing of the desire actually to spend. On the other hand, after a slightly disappointing CPI report earlier in the week, the latest Producer Price Index for February indicated that input prices, mainly due to a rise in the oil price, rose by more-than-expected 0.6%. There may be signs the US economy is slowing, yet inflation remains sticky above the Fed target. Jamie Dimon, JP Morgan’s CEO, talked this week, and not for the first time recently, of the risks of stagflation. Aside from flared jeans, those who remember the 1970s will remember what a combination of higher prices and slow growth can do to an economy.  We are a long way from there, and the US economy remains pretty resilient overall, but signs of weaker growth and stubborn prices will not make next week’s meeting any easier.

The Bank of England met next week as well. The monthly GDP report did indeed show that the economy grew month on month in January by 0.2%, after a fall of 0.1% in December. How can the ONS measure month-on-month accurately? Who knows, but we will take it as a sign of some improvement in the UK economy. Wage growth is slowing in the UK, and the expectation for the inflation rate to fall further remains; recent strength in the pound will assist in helping prices fall, possibly making the Bank of England’s decision to cut rates an easier one in the coming months.

We all know that the tech sector has driven US stock market returns for the past six months, with the index up almost 50%. The ongoing question is, are we in a bubble? Is this 2000 over again? Well, not even the analysts can agree. Barclays Plc’s equity strategist Venu Krishna believes that the big tech names don’t look overvalued by conventional metrics, assuming they can maintain their growth, which does become harder the larger you get. Using certain metrics, Mr Krishna actually believes the tech names are cheaper than the S&P 500 overall.

In contrast, the Chief Investment Strategist for Bank of America, markets are showing the classic signs of a bubble, given the record-setting surge by the technology sector’s so-called Magnificent Seven stocks and the all-time highs in cryptocurrencies.

This does take me to one final point: gold and Bitcoin have both reached record highs recently. In theory, they are assets you own during heightened periods of uncertainty. We all know cryptocurrency is an asset impossible to value on any normal basis, as it is just worth what someone else thinks it is. So why do people dabble in either when they can get over 4% in fixed-income markets or exposure to the growing world via the equity market, is a mystery to me?