The beginning of the month saw stockmarkets have their first wobble in a while, driven by the rise in global bond yields. In a sense, strong job numbers in the US and the ability of companies to pay their employees more should be a welcome feature. However, markets will fret that higher wages are a result of a too tight labour market and that businesses are having to pay up to attract more staff. The key is whether any of this feed’s through to higher inflation, something that central banks are, of course, charged with containing. The fact that stockmarkets have already had a strong run in recent months just makes the chances of a minor correction even more likely. It is worth putting this into context however. The previous two interest rate tightening cycles in the US were in 1994 and 2004. During these periods the US economy was performing well but the central bank, the Federal Reserve, feared that inflation might return. There then ensued a period of fairly rapid interest rate rises which hit bond markets quite hard. Equity markets were not immune from this, although the falls in the S&P 500 were limited to less than 10% on both occasions. Thereafter, stocks continued to perform well reflecting the continued growth in the economy and in company profits. This is the type of adjustment that markets are most likely experiencing at the moment. Major setbacks in markets, so-called bear markets, are more normally associated with economic recessions. Given the current improvement seen in the global economy, these conditions do not seem to be upon us any time soon.
Markets recovered towards the middle of the month only to be hindered by the announcement of trade tariffs on steel and aluminium by the Trump administration. With sentiment still slightly jarred from the earlier sell-off, it didn’t take much to knock share prices down again. While the likelihood of 1930s style “beggar thy neighbour” protectionism seems remote, tariff barriers are known to restrict trade, dampen growth and heighten inflation prospects – not a winning combination for equity markets. Unsurprisingly, the most affected sectors were mining companies and industrial manufacturers.
European politics dominated the headlines over the weekend following the strong performance of the Five Star movement in the Italian elections. Arguably this is another leg of the anti-establishment trend that has brought us Brexit and Trump, but the market reaction has been very sanguine so far. Uncertainty and unstable coalitions is not exactly a new phenomenon when it comes to Italian politics and the likelihood is that some sort of shaky centre-right government will be cobbled together in the coming weeks. The most important thing for investors is that Italy’s place in the Euro or the EU does not look to be under threat at the current time while ongoing QE from the Eurozone Central Bank will keep a lid on Italian government borrowing costs.
Away from politics US companies have reported an average 15% rise in earnings over the last year, with most companies exceeding forecasts on both revenues and profit. An additional benefit for investors will be the estimated $1 trillion of share buybacks and dividends that will augment shareholder returns during the coming year. The US corporate tax cuts announced at the end of last year allow companies to step up their investment programmes, pay their staff more and deliver cash back to stockholders. The only cloud on the horizon is that Federal tax revenues will be lower, meaning higher government borrowing and probably higher bond yields. Stock markets remain very sensitive to bond yields and too much upward pressure will reduce the prospect of another good year of stock market returns.
The information on this page is intended as an introduction only and is not designed to offer solutions or advice. Beacon Global Wealth Management can accept no responsibility whatsoever for losses incurred by acting on the information on this page.
The financial advisers trading under Beacon Wealth Management are members of Nexus Global (IFA Network). Nexus Global is a division within Blacktower Financial Management (International) Limited (BFMI). All approved individual members of Nexus Global are Appointed Representatives of BFMI. BFMI is licensed and regulated by the Gibraltar Financial Services Commission and bound by their rules under licence number FSC00805B.
This information has been produced by Jordan Buchanan using data supplied by Quilter Cheviot, and from publicly available data sourced from Bloomberg.com