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What we’re thinking about markets right now
Most of what matters in markets right now comes back to the price of oil.
That sounds reductive. It isn’t meant to be. Oil feeds into inflation, inflation drives what people expect interest rates to do, and interest rate expectations are moving almost everything else. Until oil stops being the dominant story, the rest is largely noise.
So this month’s meeting was a quiet one. Nothing changed in your portfolio, and nothing needed to.
The recession number, again
We track a rough estimate of the chance of a US recession in the coming year. Last month it had come down. This month it’s eased a little further.
It still sits just above the level we treat as worth watching more closely. It remains a long way below the level that would make us take money off the table.
A US recession is the thing that would genuinely change our positioning. That’s the scenario associated with global markets falling 40% or 50%, and it’s the event worth preparing for rather than the day-to-day wobbles. We don’t think it’s close.
Something new we’re watching
Steve has built a second model, and it’s worth explaining because it does something different.
It looks at three things together: how fast the market has run up recently, how calm or frightened investors seem, and how much borrowed money is sitting behind the market. On their own, none of those tells you much. Combined, and only at the extremes, they give a reading on whether the market is in a precarious position.
It went off in late May. Shortly afterwards the tech-heavy US market fell around 8%. Then the news on Iran took the oil price down, and the pressure came out of it.
The honest reading of that: the model spotted real vulnerability, and then events intervened before it fully played out. It isn’t a prediction machine. Even at its most elevated, it was pointing at roughly a one-in-four chance of a meaningful fall, against a normal one-in-eleven. That’s a useful shift in the odds. It is not a forecast.
Right now it says the market isn’t especially vulnerable.
What we looked at and left alone
We spent a while on India. It’s the one market that’s properly down and hasn’t joined in the rally elsewhere. It’s on our watch list.
But we didn’t buy it, and the reason is worth saying out loud. To buy something, you have to sell something. Japan has had a very good year. So have US shares. Selling either of those to buy India would mean selling what’s working to buy what isn’t, on a hunch. That’s not a good enough reason. If India falls further, the case gets stronger and we’ll look again.
We also talked about drift. Some holdings have run ahead of their targets because they’ve done well, small companies and emerging markets in particular. Gold has gone the other way. None of it is far enough out to act on and overnight the market had already pulled much of it back.
One decision worth telling you about
We agreed a rebalancing policy. Every October, we’ll rebalance both portfolios back to their targets, whether or not we think it’s needed at the time.
The logic is straightforward. Left alone, a portfolio quietly drifts towards whatever has done well recently, which is usually the thing that’s become most expensive. Doing it on a fixed date, regardless of what we think, is a form of insurance against our own judgement. It catches whatever we’ve missed.
We’ll review the target allocations in September before that happens.
What this means for you
Your portfolio stays balanced and fully invested. No changes this month, no rebalance.
A quiet month is not a wasted one. Most of what we do is decide, carefully, not to do things. The models exist so that when we do act, it’s because something has genuinely changed rather than because the news got loud.
If the picture shifts, we’d expect to see it in the recession estimate climbing, unemployment data turning, or in that new model lighting up while markets are priced for perfection. None of that is happening. So we wait.
Next Investment Committee Meeting
Given the summer, we’re handling August by email and meeting briefly on 4 September. The next full meeting is on 18 September.