The stock market is supposed to be rational, but at times Questor has its doubts.
Look at one number: the yield on the FTSE 100. The current figure is 3.8pc; a year ago it was not much different at 3.5pc. Yet in that time, the yield on five-year gilts has risen from 0.6pc to 4.1pc.
Returns on bonds, one of the principal alternatives to the stock market for investors’ money, have risen enormously and yet share prices have barely moved. Bonds have gone from offering a laughably poor yield to being a serious competitor to shares, but there is little sign of a move from the latter into the former.
As we wrote last week, the prices of many assets tend to adjust when bond yields change so as to maintain a gap in yield between the two. This has indeed been happening with, for example, property and infrastructure funds. It just doesn’t seem to have affected the wider stock market.
Why? This column is struggling to find a convincing explanation.
One could be that the blue-chip index is roughly where it stood almost a quarter of a century ago, at the turn of the millennium. This may provide a powerful psychological “support level”, as traders term prices that shares or indices seem disinclined to go below.
Or perhaps it’s simply that investors collectively are holding their breath.
“I’ve hardly bought or sold anything recently,” one veteran fund manager told Questor last week. “Everyone is waiting for the first sign that inflation, interest rates and bond yields are peaking, which looks likely to be in the first or second quarter of next year. Markets could experience a surge upwards at that stage.”
Another experienced fund manager said: “Many British companies don’t grow fast, so their shares tend to fall when gilt yields rise. American rates are still rising so gilt yields will too, which will drag the market down. We need to get to the end of the interest rate rises before shares do anything.”
We wrote in August how investors in America seemed to have decided that such a peak in interest rates was close on their side of the Atlantic at least. But not only does that view now look premature – the US central bank, the Federal Reserve, seems as keen as ever to raise rates to conquer inflation – but things are very different over here.
We are, for example, exposed to the effects of the war in Ukraine on energy prices, whereas America is self-sufficient; we also have to contend with a weak currency and the effect it has on the price of imports such as oil and foodstuffs.
So the moment when interest rates peak and shares have a reason to get moving in anticipation of interest rate cuts seems much further away here.
Another possible reason for the FTSE 100’s relative stability is that overseas investors, who had in any case cut their exposure to the UK after the Brexit vote, are likely to be disinclined to withdraw further money while the pound is so weak.
They may even be thinking of adding to their holdings, for which the exchange rate would work in their favour.
In some ways the FTSE 100 does look cheap, even to domestic investors: it is, as we said, little higher than 23 years ago, and in recent years it has lagged far behind rival indices such as Wall Street’s S&P 500.
But it’s hard to see much likelihood of growth in either its capital value or its dividends while all the talk is of rising interest rates and recession. In the absence of growth that 3.8pc yield is scant defence against inflation close to double digits.
This column does not tip funds (other than investment trusts) but we would not be buyers of an FTSE 100 tracker at the current price. Instead, we must as ever look for opportunities thrown up by individual stocks.
In a market that looks likely to be static at best, this will not be easy and we may, in imitation of many professional investors, sit on our hands for much of the time and concentrate on reviewing existing holdings rather than looking for new ones to buy.
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