General Market Commentary August 2018

August saw confirmation that the current US bull market is now the longest on record, having run for 3,453 days since it began in March 2009. Over this period, the US stock market has delivered a return of over 300 percent. After the worst financial crisis in living memory, the US central bank, the Federal Reserve, cut interest rates to zero and embarked on a programme to purchase government bonds and mortgages, known as quantitative easing (QE). Other developed regions swiftly followed suit. This dramatic financial easing triggered a recovery in most asset prices, although it is interesting to note that the yield on the 10 year US Treasury bond is virtually unchanged today from its level at the start of the bull market in 2009 (although the yield has been both higher and lower in the intervening period). Of course, the Fed is now reversing the QE plan and is raising short term interest rates once more as it attempts to normalise monetary policy. Other regions are expected to follow suit, albeit at a very gentle pace.

The key question now is whether markets can continue to make upward progress without the monetary boost that has been provided by central bank policy. Currently, the global economic outlook looks favourable and overall corporate earnings growth has been robust. With world inflationary pressures largely muted, central banks are unlikely to tighten policy by very much in the foreseeable future, which in turn supports the view that markets can still deliver positive returns over the medium term.

The news that the US and Mexico have reached agreement on an updated version of NAFTA has been welcomed by investors, but it is unlikely to put an end to broader trade concerns. Mexico and the US obviously have a somewhat uneven relationship on trade but that is not true of the US and China where tensions are likely to persist until at least the mid-term elections and probably beyond.

Elsewhere, we heard from the Federal Reserve last week at their annual Jackson Hole symposium but there was little change to the overall message of gradual rate rises. They remain optimistic about the US economy and are expected to hike rates again in late September. However, the flattening of the US yield curve continues to cause angst among investors, with the 10 year minus 2 year spread now down to only 20bps. While QE is probably distorting the market to some extent, it is still widely accepted that the shape of the yield curve is a good predictor of future recessions.

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