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Market commentary November 2007

By November 9, 2007No Comments

SUMMARY. Recession? Not if the Federal Reserve has their way. Stockmarket “Crash”? Not with current undemanding valuations.  Investment volatility is uncomfortable in the short term, but creates opportunities for the long term. (Sorry for the short delay in publication this month due to holidays).

There is a continuing debate as to whether rising volumes of repossessed homes in the US, hedge fund managers with huge holes in their personal wealth, and banks suffering billions of pounds write-offs should be a worry for the rest of us.

The Bank of England, caught napping over Northern Rock, felt it necessary to enter the debate and has said, according to the BBC, that “share prices could slide after recent sharp gains”.  This is hardly earth shattering, and confirms that markets go down as well as up.  It reminded us of the “irrational exuberance” comment by Alan Greenspan in 1996 – 4 years too early!

The possibility of “crashes” and recessions are regularly mentioned in the media, and this inevitably both reflects the caution of some, and triggers jitters amongst others.  Should you be worried?  To start with you have to remind yourself that superior returns are available from stockmarket investments because you accept some risk – more risk equates to the possibility (probability?) of higher returns.

Stockmarket “crashes” are derived from periods of over-valuation, usually evidenced by indiscriminate buying by retail investors or institutions or both.  It is absolutely clear that neither apply now, as we have set out regularly in our monthly e-newsletters and the last couple of editions of the TopFunds Guide.

What about a recession?  Strictly speaking a recession is a period of general economic decline, evidenced by a fall in GDP in two consecutive quarters.  If that definition hardly brings the concept to life for you, think of it more as a period of growing unemployment and falling confidence.  There is clearly a risk of recession in the US (which is still pivotal to global economic growth), yet with every negative set of economic numbers, the Federal Reserve becomes more determined to cut interest rates as aggressively as required.

The ups and downs of the economic cycle have not been eliminated, and no one should be too relaxed.  Yet the resilience of global economies has continually been under-estimated, and we believe it is just as likely that aggressive rate cutting in the US (and to some extent in the UK) is likely to trigger a reflation in 2008, with scope for stockmarkets to rise somewhat higher from their current levels, supported by undemanding valuations.

Until such a turning point we could undoubtedly see more stockmarket weakness.  If this is a worry then the antidote is to focus on the long term (positive) trends. Investment volatility is uncomfortable in the short term, but does create opportunities.

Dennehy Wealth