Run for the hills or fill your boots?

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I am a bull of stocks always have been always will be, and not ashamed of it, owning stocks is more fun than bonds and offers greater returns in the long run. That does not mean there is not a place for a few bonds in any portfolio, particularly now. Bonds are where you park money during certain points in an economic cycle, which is what many people are currently doing. Bonds also can give you an insight into the economic outlook, like all asset classes they can send the wrong signal. The bond market was horribly wrong at the start of the year, as a steeply inverted yield curve pointed to an economic recession in 2023 that did not occur, so far with only a short while of the year to go.

We had the rotten months for returns between August and October this year, for a variety of reasons. Geopolitical risk increased, valuations got stretched and equity markets finally reacted to higher yields. Although economic growth remained resilient as the US economy announced it was growing at almost 5% annualised, markets started to fear the picture may get worse from here. Sentiment got depressed, and as is almost always the case we get the bounce, then the question is asked is this a bull rally in a bear market or the start of the next bull run and time once again to ditch those bonds and fill your boots with equities?

The case for the bulls is growth resilient, earnings are generally better than forecast this quarter and it is possible analysts are a little on the cautious side for next year. Valuations outside the Magnificent 7 are not cheap but not too overvalued. The case for the bears is geopolitical risks as a result the oil price spikes, growth is slowing, and PMIs may be stabilising but are still weak. Commodity prices remain weak, particularly oil. Central bankers may have paused raising interest rates but have no intention of cutting in the near future. However, one member of the BofE policy committee suggested this week the possibility rates may start to be cut at some point next year, despite three fellow members voting for another rate rise at last week’s meeting. You pay your money, or not maybe, and make your choice.

We have had a more than 5% rise in the S&P 500 in November so far, something like a 30% fall in the Vix, which should likewise give confidence that the rally has legs. A few words of caution as one decides whether to chase the rally. The US yield curve has actually flattened this week, suggesting the bond market has taken Mr Powell’s comments to conclude that the Fed is noticing the jobs data which is starting to suggest rising unemployment rates, which in turn will bring down inflationary pressures, but also indicates a further slowdown.

On balance is it time to fill your boot or use this rally to run for the hills? Probably neither is the honest answer. The recent rally has been a high beta one, with financials, consumer discretionary and small caps leading the charge. Time for a period of reflection probably now.