The Investment Industry to Face Disruption

Stock market, back testing

In today’s Money Morning…the US market likely to lead Australia higher…how today’s consumer price inflation numbers will affect the market…why fund managers should be worried about AI…and more…

Aussie markets were closed for ANZAC Day yesterday. That means we missed out on following on from the US market’s strong performance on Monday. Given US stocks had another positive session overnight, you should see some strong gains for Aussie stocks today.

The Dow Jones index jumped more than 200 points overnight, or 1.1%, to just shy of 21,000 points. The NASDAQ index breached 6,000 points for the first time, on the back of solid earnings results and, apparently, expectations of soon to be announced tax cuts.

The Russell 2000 index of small-cap stocks also hit an all-time peak. Despite all the worry and angst about high debt levels and overpriced stocks, markets just keep grinding higher.

Stocks around the world were also buoyed by the rise of moderate French presidential candidate Emmanuel Macron as an alternative to the far right policies of Marine Le Pen.

But, according to the Financial Times, this is all part of the plan.

Europe is delighted, the markets are reassured and the French establishment is showing renewed confidence that Marine Le Pen will not become president of France. But the far-right National Front still sees a path to victory on May 7.

Ms Le Pen plans to step down as head of the FN in an attempt to look more presidential, but the party apparatus will continue to run her campaign. Senior FN officials say they plan to make the next two weeks a “clash of civilisations” between the winners and losers of globalisation, between the “elites” supporting independent centrist Emmanuel Macron and “patriots” supporting Ms Le Pen.

The next time European markets falter, you can bet that the reason given will be concern about Le Pen winning the Presidency.

The National Front party is shamelessly following the same path as the Republican Party in the US. It seeks to blame the ‘elites’ for all the world’s woes. In many ways this interpretation is correct. The real question is, what are they going to do if they get into power?

If Trump’s Presidency so far is any guide, the answer is nothing of substance. The trick to winning power is to make a lot of noise about what you’re going to do and appeal to the disaffected. But the trick to retaining power is to backtrack on your hardline promises, and ruffle as few feathers as possible.

You’d think the National Front party would have an easier time gaining support from the ‘losers’ of globalisation than the US Republicans did. After all, the French have had a very uneasy relationship with capitalism ever since Scotsman John Law bankrupted the middle classes with his money printing scheme that helped to inflate the infamous Mississippi Bubble in the early 1700s. The episode had a lasting effect on the French population, and contributed to the overthrow the French Monarchy in 1789.

But deep down the French probably know that a centrist-run government is better than the far right or far left alternatives.

For now though, global markets like what they see. Stocks are rising and the fear trade is subsiding. For example, gold fell more than US$10 an ounce, while US bond yields jumped 6 basis points to 2.33%. That’s up from a low of 2.18% last week.

All this should translate into a healthy jump in stocks on the Aussie market today. Futures point to a rise of around 30 points. That puts the market back within striking distance of making new, multi-year highs.

Where is the inflation

The main focus today will be on the mid-morning release of consumer price inflation data. The expectation is for a quarterly rise of 0.6%, so any major deviation from this number could cause a bit of volatility today.

That’s because inflation data is a major driver of interest rates. A stronger than expected number could see the RBA move rates higher than expected. A weak number, on the other hand, would revive forecasts that the next move will be down.

The more likely scenario is that the RBA will find a way to do nothing, whatever today’s number is. They don’t want to raise rates after pushing for macro-prudential monetary tightening over the past month or so. By this I mean the RBA has jaw-boned banks into raising rates for investors and risky borrowers.

And they don’t want to cut rates again, as they know any benefit from a rate cut just flows straight into higher house prices. So expect rates to remain on hold when the bank meets again next week.

But these data points are just blips and shouldn’t be taken too seriously. I mean who remembers the quarterly inflation releases from the past? They all just blend into each other.

As an investor, your job is to focus on the bigger picture. Right now, the bigger picture is bullish for stocks. It’s a time to be greedy, not fearful. Don’t let your emotions or biases blind you to this reality.

Because if you do, it will cost you. As global chief investment officer of Credit Suisse Group, Michael Strobaek, points out in today’s Financial Review, human emotion is what keeps people from beating the market:

‘…Strobaek, who is in charge of about $US100 billion in multi-asset portfolios, said it is human judgement and the disciplined human approach to equities investment which are making it increasingly hard to beat the index.

“I think, human judgement and in particular human judgement around stock picking is probably what is causing this outperformance to go down and down and down over time,” he said.’

He’s exactly right. Which is why high flying fund managers should be very worried about the artificial intelligence revolution and the coming of robots. It’s the next industry to face ‘disruption’.

That should be interesting to watch…

Regards,
Greg

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg Canavan

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