Wall Street Climbs A Wall Of Worry

Markets over the last three months have fallen slightly but are still much higher than a year ago. This is despite all the negative stories. A saying when I first came into stockbroking was that “Wall Street climbs a wall of worry.” When times are bad often the market rises. That is because the market is looking ahead and forecasting a recovery. The UK and most major economies are now experiencing a strong recovery and the UK economy still has plenty of room for further recovery in the coming year. Estimates for GDP growth are now over 5% in 2022. Consumers are still sitting on significant accumulated savings they were not able to spend during the pandemic. Yes, some are worse off but we estimate UK consumers have saved around 10% of GDP more than they normally would. In contrast to the last recession, house prices have risen by 15% since the start of 2021 meaning that the 65% of householders who own a home feel richer. Interest rates remain very low. Although forecast to rise in November, the current forecast is for rates to settle below their pre- COVID levels. The percentage of income being spent on mortgages and other debt is far below the levels that caused problems in 2008. 35% of households now own their own home without a mortgage and the 30% that own with a mortgage, half have fixed for 5 years.

The furlough scheme has ended which has kept 1.6m jobs protected but on the other hand there are currently 1.2 million job vacancies. Not all will be able to retrain but many will.

Cheap valuations

Added to this UK shares look cheap on several measures. Relative to other developed markets the UK market is now 35% cheaper. This is partly because we have much fewer tech companies, but the gap is now too stretched. We also have a lot of the more ‘boring but stable’ companies in the oil, mining, and industrial sectors, all of which have improved of late as demand has picked up meaning these companies’ profits will increase over the next couple of years.

Take over activity is high, with Morrisons, one of the companies, to recently succumb.

Paul Coffin