There are several reasons to be wary of equities right now. The dividend yield on the All-Share index – traditionally a great predictor of medium-term returns – is below its long-term average; the rise in Aim shares suggests that sentiment is too high; the global ratio of share prices to the money stock is above average, suggesting that investors have lots of equities and little cash in their portfolios; and of course we’ve entered the wrong time of year for the market.
Whenever we face an apparently strong case, however, we must question it. Hence the question: what reason is there for optimism about the market?
One is simply momentum. The All-Share index is above its 10-month (or 200-day) moving average. The rule proposed by Meb Faber at Cambria Investment Management therefore tells us to be in the market. And an investor who had followed this rule in the past would have enjoyed high returns and lower risk than a buy-and-hold investor.