Richard Champion, our Deputy CIO, presents a concise market review, assessing what’s been happening in the markets over the past month and stating it’s all about the economy.
After the big equity market rally and bond sell-off following the election of Donald Trump, the last few weeks have seen both stock and fixed-income markets trading in a range. Over recent days, Trump’s unpredictability and his clumsy sacking of the Director of the FBI have prompted a pull-back in riskier asset classes amid fears that his pro-growth agenda may be delayed or watered down. However, this hasn’t been enough to derail the trend since his election.
In fact, any tardiness in Trump’s economic reforms is almost certainly a good thing. The US economy is already growing well, unemployment is below 4.5% and consumer confidence remains high. In Europe, unemployment is falling quickly, Germany is growing strongly and there is increasing industrial and consumer confidence. Despite the distraction of the election and the shocking terrorist attack in Manchester, the UK economy continues to make progress, albeit with signs of Brexit-related strains. And China is likely to manage its economy carefully over the coming months in advance of the 19th Congress of the Communist Party of China. Finally, worldwide company earnings are improving – in most instances by close to 10%.
Consequently, central banks are likely to reduce emergency support for economies progressively over the coming year, and there’s a strong chance they’ll begin raising interest rates – foremost among them the US Federal Reserve. This will tighten monetary conditions at a time when the economic cycle is long in the tooth. As this starts to impact growth, a healthy US-led stimulus, perhaps in the form of infrastructure spending, tax cuts, tax reform and deregulation, would provide a timely boost and extend the cycle still further. We think this helps underpin the prospects for equities over the coming months, despite some occasionally high valuations.
We’re staying focused on company profits and are looking to take advantage of politically induced volatility in markets. Trump may get the headlines, but in the end, it’s all about the economy.
Investment involves risk. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.