SUMMARY. June was an uncomfortable month for markets. The US central bank announced it would begin reducing money printing one day (hardly contreversial) and confidence was badly shaken. Here we consider the issue of confidence, and reflect on what might lie ahead.

Although markets have recovered a little poise so far in July (aided by rugby, tennis, cricket and Carney?), June was an uncomfortable month. In fact there was hysteria in some parts of the media.

We’re looking back at May and June to find clues as to what might lie ahead.  At the very least this should mean we are all braced for air pockets – and less likely to panic.

It began on 22nd May, with the Federal Reserve stating the obvious, that if certain conditions prevail they will begin to reduce their money-printing exercises.  The key words are “begin” and “reduce”, nothing more scary.

Yet the response was wholly disproportionate.  Confidence is the key ingredient to which all investors must pay attention, as it drives markets.  What June tells us is that confidence is fragile, and confidence is typically fragile in three situations.  Firstly, if there is an ongoing bear market.  Secondly, close to the end of a long bull market (as the smart money gets out).  Thirdly, in the early days of a new bull market.

Our sense is that developed stock markets and gold fall within the first category, and bonds are in the second category.  To suggest that equities are in the early days of a new bull market simply wouldn’t make any sense; if it’s a new secular bull, it must have begun in March 2009, which hardly makes now “early days”.

Gold is fascinating, partly because it gets totally disproportionate attention for a fringe asset.  As the gold price broke lower in April, denial set in.  Some, who should know better, told us there was a high level conspiracy.  And soon we were regaled with photos of investors (mostly in Asia) queuing around the block to buy gold coins, and told “this is a buy signal”.  Gold did recover a tad, but has now broken lower again.  It is not clear if we are now in the “panic” phase of this gold bear market, but the conspiracy theorists are quieter, and the queues of buyers have disappeared. (The three phases of a bear market are said to be denial, panic, and capitulation/sell at any price)

This latter episode is interesting because cheerleaders for the UK stock market appear to be in the denial stage, “a 10% fall is a lifetime opportunity to buy” has been heard.  Possible, but likely only if the Fed backs off tapering, Japanese money floods into UK equities, the Bank of England follows the lead of Japan, and the ECB also announces QE.

The next few days should provide much needed clarity