An independent professional's take on the latest news and trends in global financial markets

Nose out of book

After several weeks immersed in completing the book I have been writing on the investment methods of Sir John Templeton, to be pubished in the spring next year, this week sees the return of this blog to active duty. The past three months in the financial markets have been amongst the strangest and most volatile I can remember for some while - certainly since the great crisis of 2008. Two main things (the Eurozone crisis/horror movie and an apparent slowdown in the recovery of the US economy) have dominated market sentiment throughout these months, leading to a huge amount of displacement activity by anxious investors, and a good deal of hyperbole amongst the commentariat.

Suffice it to say that the news on both counts appears to have improved in the last few days. Although the Eurozone crisis is clearly still a long way from being resolved, the US data does appear to point to things picking up on the other side of the Atlantic, which should silence the most extreme prophets of doom for a while, at least.  Having broken out of their trading range, it will be surprising if equity markets do not finish the year on a relatively strong note, perhaps even crawling their way back to the level at which they started the year. The prospect of new bouts of quantitative easing by the Federal Reserve and Bank of England have dampened yields on long term Government bond, but the sovereign debt of overborrowed developed countries continues to look a/the most vulnerable asset class on any but the shortest of time horizons.

The dividend yield on the UK stock market meanwhile remains above the benchmark 10-year Government bond yield, which is the inverse of most of the normal postwar experience, at least from the late 1950s onwards. While not itself conclusive, as the theoretical value of the ratio can be disputed, in practice when the dividend and bond yield threaten to cross over, as they did in 2003 and 2009, it often coincides with the start of a positive period for equities. This however, as I noted before disappearing into the study to commune with one of the world’s greatest investors, is such an unusual period that investors need to move forward cautiously, one step at a time.

Written by Jonathan Davis

October 31, 2011 at 4:04 PM