Are markets cheap enough yet?

The best Christmas gift for investors is a bargain. Are markets ready to be opened yet?

Article updated: 24 December 2018 9:00am Author: Michael Baxter

The FTSE 100 is down 900 points since January 1st. That’s a fall of around 13 per cent. Since peak, the all time high set in May, the index is down roughly 1,100, just shy of 15 per cent.

The S&P 500 has lost more, down just over 20 per cent since September.

Technically, the FTSE 100 is in correction territory, the S&P 500 has crashed. But I wouldn’t read much into the definitions.

It is also the case that the S&P 500 had in fact risen by over 60 per cent over the five years to the September peak. Even now, it is almost 16 per cent up on November 2016, the month of the US election that voted Trump in.

By contrast, the FTSE 100 is actually slightly lower than the price from two years ago.

So, the S&P 500 has seen sharper falls than the FTSE 100, but then it had enjoyed a much stronger rise, so it had further to fall from.

Why the falls?

In the short run, the economy and stock market can move out of alignment, but not in the long run.

There are good economic reasons for stock market falls.

In a recent Twitter survey, carried out by The Share Centre, it emerged that a relatively small ratio of investors were worried about a possible trade war.

I am sorry, but they were wrong not to be worried. While it is true that free trade can make some worse off, on aggregate, it boosts the economy. The argument that the US is somehow worse off thanks to free trade is quite simply wrong.

I am beginning to think that President Trump is not as unpredictable as people say. Sure, the precise contents of his next tweet are unpredictable, but his overall actions since he has been President are wholly consistent with what he promised pre-election.

And that, by the way includes his criticism of the Fed. If Trump tries to seize control over monetary policy, such a move would be consistent with his pre-election rhetoric. It would also be an economic disaster, but maybe not straight away.

In my view, the markets boomed two years ago when he won the US election because they thought he was full of bluff — a bark that was not as bad as his bite.

Instead, Trump continues to pander to an electoral base whose wishes are consistent with neither a more prosperous or safer world.

I am sorry to be a bit down at this festive time of the year, but Trump terrifies me, and I think the markets had been way too complacent.

Have markets fallen enough?

Times of stock market crises create buying opportunities. If you had bought into the S&P 500 a few months after the 2008 crash you would have trebled your money.

The S&P 500 doubled between the dotcom crash and 2007.

If you had bought in 2002, sold in late 2008, and bought again in March 2009, you would have multiplied your money six times over. And that is without dividends.

You could say that this is being wise in hindsight, but I don’t think it is.

There have been two periods when I have been criticised in the comments section beneath articles for being too gloomy: in the middle of 2008 and the middle of this year. Maybe, when such critiques occur, it is a good time to sell.

But is now a good time to buy?

In 2007, the S&P 500 fell by just over 50 per cent, and by a similar amount after the dotcom crash.

The FTSE 100 fell by similar amounts on both occasions.

The time to buy would be if the UK government chose to hold a second EU Referendum and if it emerges that a pro-free trade candidate for US President has become the favourite to succeed President Trump.

Or do you disagree?

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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