Bill Jamieson: A new market peak – but where’s the euphoria?

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Doubts and worries are abound despite the performance of shares, writes Bill Jamieson.

Blink and you’ll have missed it. Last week the UK’s most quoted index of leading shares hit an all-time high. But where’s the euphoria that normally accompanies market peaks? Nowhere to be seen. It did so amid a continuing blizzard of worries and disconcerting news – economic and political.

Doubts and worries abound. Our productivity record is poor. Economic forecasts are set to be cut in the Budget next month. Brexit negotiations have ground to a near-standstill. Business leaders bemoan a deepening and corrosive uncertainty. And the performance of both the Prime Minister and the Chancellor are under intense fire.

Seldom has a record peak for share prices, lifting the value of pension pots and ISA savings for millions of households, been greeted with such negativity and a lack of conviction. Fund managers fret over interest rates, financial advisers urge caution and analysts warn that a major setback may not be far off. Celebration? Optimism? Bubbling confidence? Forget it.

Indeed, the element most conspicuous in markets by its absence – particularly after such a long bull run - is the investor euphoria that normally accompanies fresh market peaks.

Now, seasoned market-watchers are always on the look-out for those tell-tale signs of excess that typically accompany market highs - the reckless optimism and “buy everything” swagger that so often accompanies long periods spent at the central bank low interest rate punch-bowl. That’s a clear “sell” signal, they warn.

Instead, we’ve become a nation of Victor Meldrews – beset by gloom and moaning to anyone who’s still listening: “I just don’t believe it”. Before long, we could be slumping comatose across our bar stools, preparatory to an inevitable crash to the floor.

For the moment the market reality is otherwise. Today the FTSE100 has left the black days of the 2008-9 financial crisis well behind. At 7,535.44 it is now just a whisker below the record level reached last week and is standing 12 per cent above its 12-month high – a bull run that has now lasted nine years.

Nor is this confined to the global corporate behemoths that derive most of their earnings overseas. The FTSE250 Index, comprising mid-size companies with sales and earnings more focused on domestic UK markets, has also been hitting new highs. Cause for cheer? Not so, say the sceptics. The latest market highs are the result of falls in the pound caused by growing anxieties over the stalled Brexit negotiations and the prospect of a “cliff edge” exit from the EU. The further that sterling falls, the greater the competitive advantage for UK companies selling into global markets. But it also brings higher raw material and import costs, pushing up inflation - and with it the prospect of higher interest rates as soon as the year-end.

But the new peaks in share prices are far from a UK-only phenomenon. Markets in the US, Europe, Japan and the developing world have also been enjoying long upward runs, drawing encouragement from evidence of global economic growth.

As the Financial Times reports, the International Monetary Fund says the global economy is enjoying its fastest growth spurt since the post-crisis recovery in 2010 and has raised its forecast for 2017-18. Says its chief economist Maurice Obstfeld, “this not bounce-back from a sharp deceleration, this is an acceleration from the fairly tepid growth rates of recent years, so that’s really good news”.

But while outright euphoria may not be evident, there are signs that this long market rally may be entering its final phase. A research note from Morgan Stanley entitled “The Perpetual Rally” points out that the shares of smaller companies and cyclical industries have outperformed lately, while stock correlations are continuing to fall – all typical signs, say the analysts, of budding positivity – and a bull market entering its final years.

That positivity could persist, and continue to defy the warnings from many investment analysts of a coming correction. What is lacking is an evident trigger or catalyst for a market fall. These might seem to come out of a clear blue sky - though in fact the warning cones have been evident for some time.

This may take the form of sustained interest rate rises next year as central banks curb their stimulus programmes, or a geo-political shock. But these have been so well signposted over the past year we have almost become inured to them. We may not be displaying the euphoria of the peaks of yesteryear. But there is an equal danger that our senses have grown numb. It will take an event “jolt” to shake us out of a - non-euphoric - complacency.