...in politics as they say and it has certainly felt like a long time in the market this week with all the ups and downs and the political shenanigans. To be honest it has felt more like a circus in the political arena with Boris the clown & his trusty assistant David unleashing all sorts of chaos before waving goodbye and leaving someone else to clear up the mess before they head off to a Bullingdon Club reunion later this summer, perhaps? While in the City it has felt more like the Casino, that everyone accuses it of being, while we are now left worrying about some of the high rollers leaving the tables and heading out of town.
I have deliberately not posted this week because quite frankly we now seem to be in uncharted waters with the whole political and economic arrangements with Europe and the rest of the world being re-cast. With all that going on and to be decided nobody really knows what the outcome is going to be, but there have been some big moves in markets as they get over the shock and start to discount what they think will be the outcome. This seems to be an expectation of a domestic recession (two quarters of negative GDP growth) with perhaps around 70% of economists in a survey I saw on Bloomberg recently expecting one either this year or next. Thus domestic focussed and cyclical stocks related to the housing market plus banks and property companies have been the largest fallers, while the larger cap names and exporters who will benefit from weaker Sterling have been the obvious immediate winners.
This has been reflected in the headline indices this month with the FTSE 100 leading the way with a positive total return of over 4%, while the FTSE 350 and FTSE All Share were also up on the month but to a lesser extent due to their mid cap and small cap exposure. These parts of the market, reflecting their heavier exposure to domestic companies and sectors, took most of the pain with the FTSE Mid 250 being down over 5% and the Small Cap index by over 2%. Having said that though there were obviously individual stocks and sectors within that, like the house builders for example, which got hit much harder than that. Thus if you have a bias in you portfolio towards these parts of the market, as I do, then all the talk of the "market" being back to levels it was at before the referendum will certainly not reflect what you have seen in your portfolio.
Any way in terms of the Monthly Timing Indicators for the UK Market that I follow, which are based on total return indices, these also reflect this divergent performance from last month. Thus FTSE 100 has moved further above its 10 month moving average to be some 6% above it which is bizarrely the most bullish it has been since I started following these at the start of 2014 and quite a turnaround from its bearish trend which ran from August last year to March of this year (see Chart at the end). The other headline indices, the All share & 350 are also still more than 4% above their moving averages, being dragged down a bit by their mid and small cap exposure as discussed above. While on these the Mid 250 is back below its moving average by 2.6% having been above by asimilar amount last month, so quite volatile to say the least. While the Small Cap Index is just about hanging onto its moving average being 0.1% above it.
So quite an abrupt turnaround in the performance just when it looked last month as though all the indices were turning bullish. As discussed above this reflects the shock of the referendum result and the move by investors to discount a recession in fairly short order. As suggested last month I'm not too sure I would put too much faith in this indicator at the moment given the outcome of the referendum.
The 64 million dollar question from here is if there will be a recession and if so how severe might it be. Somewhat surprisingly I heard that Mark Carney is now suggesting rate cuts on the back of this having before the vote suggested that rates and mortgage rates etc. would rise. We have also not yet seen George Osbourne's punishment budget, but I guess we could still see something in the Autumn, but again, given the background, I guess there is a chance that this looks to support the economy by letting the deficit take the strain rather than cutting spending and raising taxes as threatened. I also note that mortgage rates are likely to come down on the back of the lower bond yields from the flight to safety that we saw, again the opposite of what was suggested. Who knows with all these opposite outcomes perhaps the Referendum result in this Boris in Blunderland political story May be that we end up staying in the EU!
Summary & Conclusion
So we are at the end of a momentous week for the UK with the whole political establishment tearing itself apart after the general public seemed to stage a backlash / protest vote against the banks, big business and the political elite in London as some commentators have suggested. Which still leaves me worried that they may still try to ride rough shod over this by insisting that we have another vote on this down the line until the masses come up with the "right" result as far as the political elite are concerned. Well lets hope they stick to what they are saying at the moment about respecting the outcome but I'll believe it when I see it.
As for markets the turnaround in the indices discussed above reflects this new changed reality and when times get tough it is more normal for large caps to out perform and Mid and Small caps to struggle more, so this may just be the start of the new trend for now until the economic picture becomes clearer in the months ahead. Conversely it may be that the fears of a recession have been over done and not that much damage will be done, a slow down rather than a recession perhaps? In that case some of the sell off may be an opportunity in certain sectors like the house builders perhaps rather than a reason to panic? As ever though you pay your money and take your choice on those potential binary outcomes and time will tell.