Those of you fortunate enough to have attended one of the seminars with which I have been associated will know that I am fond of using quotations to illustrate a point. Some people are truly gifted at coining a few words to give colour to a set of circumstances. One quotable individual is Alan Greenspan.
Greenspan has a habit of delivering phases that find a place in common usage. “Irrational exuberance” springs to mind, even if the timing of this particular bon mot appeared a little premature. It remains to be seen whether the Federal Reserve Bank's long-serving governor was more on the mark when he announced the end of deflationary threats last week.
You might have thought that such a pronouncement would have bought some cheer to markets but shares took flight at his words. The reason is not hard to divine. Economists and strategists took his comments as a ground-preparing exercise for dearer money. His assertion that US companies are regaining pricing power was accepted as evidence that inflation could be on the up and higher interest rates inevitable.
The US picture looks increasingly encouraging but investor confidence is fragile. The State Street investor confidence index fell in April for the fourth month in a row. Continuing uncertainty in the Middle East is weighing on investors' minds but the prospect of a hike in interest rates, coupled with resurgent inflationary pressures, adds to concerns.
Back home, the economic numbers are creating the tiniest amount of confusion. Inflation is falling rather than rising. The rise in the cost of living is significantly below the Chancellor's target. Yet there was one vote for a further rate rise when the monetary policy committee met at the beginning of April. Deputy governor Andrew Large is apparently more concerned at the robust nature of the housing market than the subdued outlook for inflation. Most market watchers consider that sufficient of his eight colleagues will opt for a rise in May to make another quarter-point increase inevitable.
We approach May with a generally improving picture on the corporate front, enough deals on the go to ensure that City bonuses are returning and a global economic picture that suggests a firm foundation for the future is being created. Markets can see this, hence the recovery back to the peaks established earlier in the year. Progress must depend on a continuation of the virtuous conditions that are developing and a lack of shocks, particularly of a geopolitical nature.
Stockpickers can take comfort from the reinforcement of the management stories that have been around recently. Centre stage is Tesco, which is proving that a considered approach to building long-term value can create a force to be reckoned with. The disarray that areas of the supermarket trade have found themselves in has helped but Tesco is expanding on a number of fronts, most notably in non-food and abroad, which in selling space now outguns the home market.
Tesco is a share that has served private investors well. It has a strong brand and recognisable values. But so did Shell, also a company much beloved by private investors in the past. Shell looks less sure these days – not that the two businesses should be compared too closely. Still, if anything can remind investors that companies seldom continue to grow unchecked, it should be the problems facing Shell. Stockpicking is as much about knowing when to sell as when to buy.