The Lowdown on Markets to 3rd April 2015
- Global equity markets deliver mixed performance results for the first quarter of the year.
- Europe and Japan out-performs the US and UK as their central bank policies decouple.
- A weaker than expected US jobs report spooks the markets and questions are asked.
- In the UK the first televised General Election debate bodes well for the prime minister.
- Commodities have a torrid quarter as a stronger dollar and slowing global economy hits.
- As we enter the seventh year of the bull market concerns begin to mount.
What does this mean for the markets and asset classes?
“The quarter ends and questions are being asked about the US economy”
“Failure is not an option” this was a quote that was attributed to NASA Flight Director Gene Kranz during that fated Apollo 13 mission in April 1970, although, he actually never said it. Unquestionably, back in those days the Americans were indeed the world’s leading pioneers into outer space, and for many millions of people around the world, following those missions, were incredibly exciting and at times daunting. I suppose in a not too dissimilar way the same could be said about the present-day uncertainties that seem to be clouding expectations for the global economic recovery.
Clearly, for many millions of investors they too have been travelling through a journey of excitement and tribulation over the past few years, and just like Gene Kranz at mission control Houston the US Federal Reserve Bank could easily endorse those same words “failure is not an option” when they responded aggressively to the financial meltdown that was created by the credit crunch and those subsequent events.
Indeed, as the financial landscape began to spiral out of control the Fed took evasive action and implemented a monetary policy programme of aggressively cutting interest rates to their current historical lows and flooding the market with “cheap dollars” through three rounds of quantitative easing that began in 2008 and concluded in 2014 and an additional stimulus called “operation twist”.
Certainly throughout this fragile period the Fed’s monetary policies has been beneficial in supporting the US economy, and whilst their recovery remains modest, the likes of improving unemployment numbers, household finance, consumer spending and a housing recovery, has been stimulative to the markets and riskier asset classes.
Clearly, the unemployment rate is down significantly from those in October 2009, when 10% of Americans were out of work, but as we saw from last Friday’s latest unemployment figures we may now be hitting a soft patch in the economy given that only 126,000 jobs were created last month against an expected figure of 245,000. Never-the-less the latest figures did show that job creation in the professional and business services, healthcare and retail was buoyant whilst jobs were lost in the mining industry.
Undoubtedly, these latest figure will create some uncertainty in the coming weeks given that they were the worst numbers since December 2013. Arguably, a strengthening US dollar and the collapse in the crude oil price has not helped, and of course we are seeing a softening in corporate profits, which could become more evident over the coming weeks given that we are now in the midst of the Q2 earnings season. Furthermore, we have also seen a slowdown of the US economy in the fourth quarter of 2014 and the first quarter of 2015.
Even more bewildering is the language being used in the last few FOMC meetings when the Fed have gone from being dovish, to more hawkish, and then back again, using certain words within their text such as “patient” then withdrawing it in their next statement. This continual debate as to the actual timing of the first interest rate hike is now muddying the waters. Whilst the markets are responding positively to the assumption that US interest rates will not rise until September or even March 2016, could lead to the prospect that the Fed will be behind the curve meaning that they will need to raise rates quicker and conceivably by eight or more times next year to reach the new heralded normal this could then ultimately spook the markets.
Admittedly, there are issues to address such as the strengthening dollar; however, we have already seen in the first quarter of this year how uncertainty over the Fed’s stance and recent economic data has already driven the Dow Jones and the S&P 500 Indices to a mediocre return versus the likes of Europe and Japan.
Whilst it is very important is for the Fed to make the right decision as to the actual timing of the first rate hike, given it would create a concern if they were to go too early and then need to reverse it out, but a small gesture now would probably do very little harm, particularly when Fed chair, Janet Yellen, has already suggested that the raising of interest rates will be done more slowly than in past recoveries because of the unusually fragile condition of the American economy. Consequently there would be no repeat of the two-year period beginning in June 2004 when the Fed raised rates by 0.25 percentage points at every meeting.
Arguably whilst Friday’s US unemployment numbers were important it was also the end of the first quarter of 2015 which was thought-provoking for a number of reasons. Indeed, we saw 26 global interest rate cuts, and the launch of the ECB’s €1.1 trillion quantitative easing programme which began in March 2015 and will extend to September 2016. Also on the European theme, we saw nine countries bless us with negative interest rates. These events helped to propel the European equity markets skyward, assisted by a weaker euro, and lower crude oil prices. More importantly, we are likely to see upgrades in European corporate profits over the coming months, which in turn, should lead to higher stock markets.
Equally, in March the US central bank downgraded its forecasts for growth, inflation and interest rates, and clearly by the tone of Ms Yellen’s recent statement the stronger US dollar is having a disinflationary effect on their economy and therefore is likely to have further consequences for corporate profits, and perhaps preventing the first rate hike until later in the year.
In the UK, the chancellor, George Osborne, delivered his final budget before the General Election which is clearly too tight to call. However, in the first televised election debate the prime minister, David Cameron, SNP leader Nicola Sturgeon, and UKip Nigel Farage faired pretty well in the tv polls, whilst Labour leader Ed Miliband less so. Understandably, from a UK perspective the market will be under the influence of the election until we know the result on 07th May 2015, however, in terms of the market we did see the FTSE 100 Index breach the 7,000 barrier, creating a new all-time high.
In Japan the Nikkei 225 Index continues to rally and is currently sitting at a near 15 year high and not far from breaching 20,000 on the Index. With Japanese equities still looking fairly inexpensive and a tailwind from a weaker yen, lower oil prices, and the prospect of further QE, we could see the Nikkei propel itself to a near a 24 year high, if the index were to breach 23,000.
Uncertainty over the future direction of US interest rates, and stronger dollar, has left the emerging market indices with a mixed set of results over the first quarter, indeed, weakness in the Indian and Latin America stock markets were offset by a stronger performance in the Chinese market as expectations mounted that the authorities in Beijing will ease their monetary policy further to counteract uncertainties surrounding lower GDP growth and a property downturn. Arguably, if we were to see looser fiscal policies in China it might bode well for some of the Asian markets.
And so as we enter the second quarter of 2015, and the seventh year of this current bull market, the overall backdrop for most asset classes, and markets, seems fraught with uncertainty, therefore, it might become easier for some global investors to abandon their faith in equities creating a period of volatility, conversely, the positives are that central banks will remain supportive of loose monetary policies whilst mindful of weaker economic data. The benefits from a lower crude oil price should be helpful to those countries that import their energy, whilst being beneficial to the global consumer, likewise those countries with weaker currencies should see their exporting companies benefit from better corporate profits, whilst the geo-political scene seems to have taken a positive move for the better.
Equally, it would be prudent to keep a watchful eye on the Fed, US unemployment, and any further strength in the US dollar which could all derail their economic recovery. Finally, it’s been 45 years since that fated Apollo 13 mission that thankfully ended in a successful return to earth for Messrs. Lovell, Swigert and Haise, and similarly to then “Failure now is not option” for the global economy, however, like Jim Lovell said when he realised that there was some concern, “Houston we have a problem”, let’s just hope that the Fed are still ahead of the curve and that they do not need to make a similar comment.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum he worked within larger asset managers, primarily as an Investment Director within Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Investment Committee. This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.