Sunday, 19th November 2017
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John Smiles

Qualified Financial Advisor

When will equities crash?

From 6th March 2009 to 3rd November 2017, the S&P 500 increased spectacularly from 683.38 to 2,587.84 and the FTSE 100 from 3,530.73 to 7,560.35. Many analysts have been predicting a stock market collapse based on stock markets being at all-time highs; bull markets have traditionally never run for longer than 7 years and the day of reckoning is coming.

While nothing is forever, it is very difficult to predict exactly when the next bust will occur. At a time of almost zero returns on cash and bonds, investors are understandably, not anxious to cash in their equity holdings and transfer their accumulated capital to a zero earning asset class. Why therefore, despite this conventional wisdom, do equity markets continue to grow with no sign of weakness?

The huge transfer of debt from the corporate sector to governments or taxpayers following the 2008 crash has been a factor. The Irish Government alone took on debt of over €67 billion to bail out its banks.

Overall, company balance sheets are stronger and companies have little debt on their balance sheets. Nestle, the Swiss based chocolates to cereal manufacturer and one of Europe’s strongest companies recently saw prices for its debt fall. This means yields, which move inversely to prices, on a Nestlé euro-denominated bond, fell to minus 0.25 per cent. Investors are in effect paying to hold the bond.

For many people, the only time a company comes to their attention is when there is a scandal or other trouble on newspaper front pages. Out of the headlines, companies are proactively running their businesses, containing costs and increasing income as far as possible. This provides a steady stream of profit over time which is used to re-invest in the business to maintain competitiveness and to be paid out as dividends to shareholders to reward them for the risk they have taken in investing in the business.

While a market correction fall will surely occur, no one knows when. In the meantime, those investing for the long term will likely be better off remaining invested.

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