Stock Market Rally: Panacea Or False Prophet?

Opinions abound. Some point to the woeful state of the global economy, and question whether markets are losing touch with reality. Others claim markets are pricing in undue pessimism, and are adjusting toward "fair value". And there is no clearer steer on this from the sum of the world's economists, investment managers, pundits and general know-alls, who hold bewilderingly contradictory views.

Whatever their perspectives on the short term direction of markets, investors need to adjust to seismic shifts that will re-shape the investment landscape this century. The tectonic plates of received investment wisdom are shifting at an astonishing rate, and the current crises are accelerating this process. The main considerations for stock investors will now be whether they need to re-think where they invest and, indeed, whether there might be a better route to securing long term capital growth

Unless investors are endowed with the gift of second sight the short term direction of markets will best be ignored, placing an entirely different slant on investment decisions. Rather than look to benefit from short term emotional flows, we can peer into the future for guidance. In order to do so, a look back at the past can be instructive. After all, while history does not necessarily repeat itself markets are moved by human beings, and human psychology does not change materially.

Stock market growth broadly follows economic growth over the long run. So stock investors will logically determine where the greatest economic growth will be found in the future, and back the answers. This will point them away from the developed economies, and will also align them with the wisdom of the ages - that one should always side with empires in the ascendancy, not those in decline.

The past decade has seen stock markets lurching from crisis to crisis of man's making, and all have all have moved broadly in tandem. But during a calamitous priod in which developed economy markets have delivered starkly negative returns, others have performed much better. If we are to believe half of what both history and the markets are telling us (a "double whammy guide") the great majority of investment dollars concentrated on the developed bloc should be looking for homes elsewhere.

Paper assets (stocks, bonds and currencies) are in growing turmoil, and it is always questionable how much more any of them are worth than than the paper they are printed on. It is therefore conceivable that folk will increasingly move toward investment in tangible assets that are both proxies for economic growth (like stocks) yet are impervious to the attempts of mankind in general, and central bankerss in particular, to debase them. These include the likes of copper, crude oil and, arguably, silver bullion.

These tangible assets also double up in the capacity of human essentials, which adds agricultural commodities to the above list. Folk don't need General Motors, but they will always need food, power, heating and somewhere to live. Comparing the price movements of the above real assets with those of stocks over the past decade (a "long term" by most standards) gives a good feel for what the markets are telling us in terms of which are the most relaible vehicles for our savings and investments

So folk might do well to look through short term stock market movements to the serious questions that lie beyond. Will the strategies of the past serve them in the future? Stocks will always be valuable components of investment portfolios, but both history and markets are shouting that folk need to think again as to where they invest. Likewise, they should consider whether they will achieve greater security of returns by looking toward investment vehicles furnished by mother earth, rather than by mankind.

We are entering a new world, and new thinking will be essential.

Andrew J D Martin; 17 April 2009

Andrew Martin is a UK Independent Financial Adviser. His blog is at http://ifasoapbox.blogspot.com/, and you can email him on a.martin@keybenefits.co.uk.