Equity markets have continued their march higher over the last few weeks, fuelled by optimism that the new US administration will deliver a pro-growth, anti-red tape agenda and drive faster economic growth and stronger earnings to companies. At the time of writing, the FTSE 100 Index has risen by 4.9% since the end of January 2017, with the S&P 500 Index in the US up by 4.0% over the same period.
However, with the US Federal Reserve raising interest rates by 0.25% on 15 March and offering a measured outlook for US growth, employment and inflation, the immediate beneficiary seems not to have been equities but US Treasury bonds – as evidenced by their rise in value following the announcement. At the time of writing, the FT Actuaries Gilts All Stocks Index is up 3.0% since the end of January.
As we assess economic momentum, we turn our attention to the political risk. In Europe this remains elevated, despite the general election defeat of the largest Dutch anti-Euro party on 15 March. With the UK triggering Article 50 and starting the formal process to leave the EU, along with French presidential elections in late April and early May, media attention remains focused on the potential for market disruption from populism and its after-effects.
After a strong year in equities, there’s a widespread sense that it may be time to pause for breath; and that perhaps, given the political risks on both sides of the pond, there may be an increase in volatility, or even a market correction.
However, with economic momentum still positive, we would look beyond any such setbacks. Even if they have begun to rise in the US, elsewhere interest rates are still low – and at this very early stage of the tightening cycle, we believe there’s room for risk assets to continue to move higher.
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.