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Quick Thought Of The Week: Confidence

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Happy New Year, everyone!

So much for the year end Santa Rally! It seems that Santa’s sleigh, last year, had been pulled by a team of White House donkeys rather than ultra-fit reindeers.

The confidence that had once driven global markets ever higher has now been replaced by utter disbelief. Gone is the mantra of buying on the dips. Instead some experts are now advising to sell on the rallies.

The Trump rally has left town. In comes the Trump slump.

But just as the hype over the new administrations promises was greatly over egged, the pessimism over its handling foreign affairs, its clumsiness in negotiating trade deals and its ineptitude in coping with America’s annual budget looks to have been overdone, too.

The market now reckons that the outlook for the global economy is uncertain, and borders on dire. That is understandable, given that the US administration appears to lurch from one crisis to another….

…. and moments of apparent calm are quickly punctuated by public relations calamities and embarrassing high-profile resignations.

Once the confidence has gone, it is very hard to regain.

Just look at the recent well-intentioned but ham-fisted attempt by the US Treasury to regain the trust of the market by reassuring everyone that banks have enough liquidity in the event of a crisis.

The thought of a banking crisis had never even crossed the market’s mind. After all, US banks had undergone and passed the most stringent of stress tests. But now there are real doubts, given that this administration has spun more yarns than the Grimm Brothers.

Stock market is confidence is in short supply. That can have an impact on share prices, which in turn can affect the price-to-earnings ratio.

But provided earnings are unaffected, it means that we can buy more of the shares we like at lower prices.

Warren Buffett once said: “When investing, pessimism is your friend, optimism is your enemy”. He’s right. But it does require courage.

A version of this article first appears in Stock Advisor.

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