‘Congratulations. I knew the record would stand until it was broken’ – Yogi Berra
I kind of feel the same way about records as Yogi Berra does in the quote above. The biggest influence on stock market records is typically not economic growth (although that helps), corporate success stories or even time per se. It is that worryingly omnipresent economic trait of…inflation.
I will make two observations about the stock market and inflation over time. The good news is that there is probably no better asset class – except gold which does not pay a yield – over the longer-term to protect your wealth against inflation than the stock market. Forget bonds with their nominal coupons and fixed principal values. And do not even start me off about cash in the bank. I agree property could have a role but beyond having a place to live, property is large and lumpy and potentially illiquid – at least you can typically sell shares in the stock market or gold with a relative minimum of fuss.
The reason the stock market guards against inflation, is that individual corporate names have an ability to raise prices and adjust their business approach, to try to improve margins over time. This combination of efforts across a stock market – even including those who struggle to achieve this – tends to push stock markets up over the longer-term. However do not fail to forget that if the general price level has doubled along with your share portfolio, then all you have done is maintain the purchasing power of your investments. That’s why a nominal index point level for a stock market index is unfortunately not as exciting as it sounds.
The other reason why i cannot get that excited about a record stock market is that…it can be a long time coming. Who remembers the first 7,000 point breach of the FTSE-100 index at the height of the technology, media and telecoms (TMT) stock boom in 1999-2000? And the next time the FTSE-100 pushed above the 7,000 level? Step forward early 2015 more than half a generation later – and a year after that the index was down close to 5,500 points. Such is the influence of fear, greed and other psychological traits on stock market investment as well as inflation per se.
However it is this latter group of influences which do make the stock market interesting for me. Dig below the surface and the record FTSE-100 can be attributed to some sharp recent rises in energy sector shares (in which it has a strong weighting) aided by an improvement in perceptions towards the Brexit story. In different ways we have exposure to both themes in the Dynamic Opportunities Fund. I have talked before about ‘mix matters’, namely the importance of identifying compelling investment themes and, from these, interesting and relevant individual share investments. This is what the record FTSE-100 level says to me: the stock market remains a living, breathing mix of different themes and individual stocks, pushed around by economic and political trends and human psychology. I am not focused on whether the market will set a bevy of new highs over recent months or not, I am focusing on trends, opportunities, psychology and real value allowing us to choose compelling individual share investments. And, on that basis, 2018 remains a most interesting year.