William John Market Report 29-10-21
William John Market Report 29-10-21Category: Reports
This week, 10-year maturity UK Gilts (the Treasury’s government-back bond) saw the highest one-day change in yield since the outbreak of the pandemic in March 2020:
Source: William John Analytics, marketwatch.com. Yield recorded at close.
Yield, which moves inversely to price, indicated a strong positive reaction from investors on the news that the Government was prepared to slash its planned debt this year by almost £60 billion. The Debt Management Office, which is responsible for the issuance and management of UK sovereign debt, said that it was cutting its planned gilt sales to £198.4 billion for the 2021-22 fiscal year, some £57.8 billion less than it has forecasted it April (approx. £250 billion).
Announced officially in the Chancellor of the Exchequer’s 2021 Budget on Wednesday, the decision comes off the back of stronger than anticipated tax revenues stemming from the rapid economic recovery exhibited in the UK since the lifting of lockdowns and related restrictions on businesses. This in turn has benefited from higher-than-normal levels of savings for consumers, accommodating fiscal and monetary policies, and tax breaks across multiple sectors.
Elsewhere, the FTSE 100 and S&P 500 remain close to their all-time highs (next page). Since March 2020, the S&P 500 and FTSE 100 indices have appreciated 78% and 28% in value respectively. Investor uncertainty continues surrounding current inflation levels in the economy – which erode real returns on fixed interest investments as well as the purchasing power of income and cash – and whether central banks will raise rates too soon to slow down the pace of inflation, hampering economic recovery.
However, the bond and equity capital markets have not overreacted just yet. If anything, investors should pay caution to the current levels of the cyclically-adjusted price/earnings ratio, or CAPE, of equities as these stock valuations are at their highest multiple of earnings since prior to the Financial Crisis in 2007 and, in the case of the US, since the burst of the dotcom bubble in early 2001:
Source: William John Analytics, Yahoo Finance
Source: William John Analytics, Barclays Historic CAPE ratio.
US in Blue, Europe in Brown
With valuations for stocks so high, a serious question should be posed as to whether these valuations are accurate and representative of the growth potential in European and American business, or whether these valuations are a function of accommodating monetary policy and high levels of savings during the pandemic era. If it is the latter, a market correction could be on its way with the majority of governments and central banks indicating a reversal in current accommodating measures expected in 2022 or early 2023.
Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.