Cut down the noise: the sole reason equity markets are going higher

Every Monday morning, my email sends me a very powerful reminder of why the equity markets must rise over the medium term. A very clear, unequivocal, message that signals the future direction of our markets. Irrefutable, obvious and repetitive. And yet most investors miss it.

What is this signal and why do so many investors fail to see it? Let’s begin with the 2^nd question first. Most likely the reason that investors miss this signal, is that we are being completely overwhelmed with information, and the volume is drowning out what requires our ongoing focus. We are being overwhelmed with ‘useful but not critical’ data to the point that we are struggling to apportion weighting and priority. Every piece of information blurs into the next.

Consider a recent summary we compiled of just some of the issues that face our markets:

And this is a snapshot. Next week, there are likely to be new issues.

Yet many of these issues whilst ‘relevant’, are not critical. But like a lawyer trailing in a long running court case, they deflect and distract us from what is important.

The successful investors that we have been able to get close to, all seem to have a relatively clear set of criteria that they focus on. Their success is not from doing something ‘brilliant’ or analyzing every piece of data. Rather the opposite is true. Their success comes from doing the right thing at the right time all the time. Their singular focus on what is important enables them to move calmly, confidently and rapidly in times of crisis.

The challenge we have as investors, is not to analyze every last piece of data, but rather to understand what is important, focus on that and allow it to anchor us through the inevitable volatility.

Which brings us back to my weekly reminder. At about 8am every Monday morning, I receive an email that looks something like this:

Whilst the weekly deposit ‘specials’ may look innocuous or just another data point, to the experienced investor they are the proverbial punch in the face. A clear and irrefutable signpost: 0.55% less tax, less inflation equals negative 2%. Negative 2%.

The longer investors sit on a return of negative 2%, the more the pressure is building. Compelling them to move up the risk curve. There is simply no other choice. Investors will be forced into other asset classes to seek a positive real return. Reluctantly at first, but inevitably in the end.

Remember, marginal buying is what moves assets – individually and collectively. As investors start the long migration out of cash and fixed interest and into equities, valuations will expand and yields contract. Of course this is a medium term driver, and over the short term, ‘noise’ will drive share prices.

For our team, our challenge is to prioritise what will drive the big moves in our market and remain focused. As we sit here today, few things are more important than the cash rate, whose current level is unprecedented in all the history of our markets.  

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