After a particularly painful trading period, the father of modern economics, John Maynard Keynes, once cautioned that “markets can remain irrational longer than you can remain solvent”.
To my mind, since the financial crisis markets certainly have behaved irrationally, at least in the sense of being disconnected from fundamentals.
At times you could argue they have been “predictably irrational”, to cite the title of behavioural economist Dan Ariely’s book. This follows central bank money-printing activity rather than economic or company fundamentals, which boosted asset prices with barely any impact on the real economy.
However, with unconventional monetary policy starting to be recognised for the confidence trick it really is, and markets seemingly pricing in a rosy outlook, anything that shatters the illusion of normality could be painful for traditional asset classes.
Given this, there are a number of concerns that should lead to a cautious investment outlook. Among these are the banking troubles in the eurozone and China, the problems of income inequality and a potential Trump-invoked global trade war. However, to correct this even some of the established market themes must be challenged.
