What are the best warning signals for economic change? Rarely is it the stockmarket itself. Certainly, market moves grab headlines and get attention, but not much genuine knowledge is involved in panic selling. Indeed, there has been relatively little actual selling involved in recent market moves, which are now amplified by a withdrawal of buffers and trading capital from investment banks. And the echo-chamber of social media comment seems largely just noise.
In the run up to the financial crisis, there were good indications from the world of credit. Today is missing those clear signals, although some bonds are indeed behaving like junk. But 2019 is not 2007: the overall picture still looks more like a late cycle correction than a sustained global recession. Fiscal and monetary policy is not exhausted, and stimulation is coming from weaker oil prices and a lower US Dollar. In the UK, tightening of the labour market is creating real wage growth, which will benefit many domestic businesses.
The best signals over the cycle seem to come from meetings with company management themselves. Sentiment on current business conditions and immediate prospects is usually evident, reinforced by investment plans. At times of stockmarket volatility, investors should remember they are investing in businesses and valuing cashflows. Much of what circulates publicly, matters less.
The UK economy continues to be resilient, UK equity allocations are at lows, and domestic stocks are already pricing in a pessimistic Brexit outturn.