The Lowdown on Markets to 10th February 2017
World Markets at a Glance
In this week’s issue
- Global equity markets continue to react positively to Trumponomics
- Wall Street’s Dow Jones Industrial and Nasdaq Composite trade at all-time peaks.
- Investors pile into junk bonds on promises of a phenomenal announcement in US taxes.
- Share prices make new highs, volumes die, and volatility appears compressed, what now?
- European Government bond markets react to Le Pen’s statement and election fears.
- As risk assets continue to rise is it irrational exuberance, or is it different this time.
“Stock markets benefit from renewed bullishness and the Trump trade”
The global equity markets have remained buoyant over the last five trading days as renewed bullishness, and the return of the “Trump trade”, nudged risk assets higher. Equally, it would seem that every week the markets are being powered by a comment from the president on his, and his administration’s proposals for the American economy. Indeed, like a weekly top up of vocal rocket fuel the markets are reacting to his every word, whether it’s from his desk at the White House, or on twitter.
This weekly Wall Street shuffle has seen both the Dow Jones Industrial Average Index, and the Nasdaq Composite Index, trade at all-time peaks, whilst the small-cap Russell 2000 Index was near its record level. Likewise, in Europe, UK and Japan the Stoxx 600, Nikkei 225 and the FTSE 100 Indices have all benefited from the “reflationary trade” that president Trump has spoken about since his election win and subsequent inauguration.
However, whilst the markets are taking a positive view from these weekly promises from the president of fiscal stimulus, infrastructure spending, and deregulation, it still remains to be seen whether he and the US administration can actually deliver? Indeed, only last week the US president has promised that he would be revealing a “phenomenal” announcement on taxes over the next few weeks, potentially at his 28th February 2016 State of the Union address to Congress. This in itself gave Wall Street, and its traders, another big injection of bullish steroids and closed the week out on another upbeat note.
“The US president has promised that he would be revealing a phenomenal announcement on taxes”
This then begs the question, “is the current positive euphoria in the markets sustainable”, clearly, we are just about to celebrate the eighth year of this current bull market, the second longest in financial history, and the new US president is determined to change the economic backdrop, and prosperity of the American people. Remember the words in his inaugural speech “America First”. Also in the UK, the new iron lady, prime minister, Theresa May, is determined to invoke Article 50 and make the UK “stronger, fairer, more united, and outward looking, whilst supporting the European Union.
Also in respect to the global economy, growth rate forecasts for 2017 have been recently upgraded, led by a more optimistic outlook for the emerging markets, the UK, regardless of Brexit, and the US boosted by Trumponomics. Admittedly, US interest rates and inflation are going to rise, uncertainties over the Chinese economy remains, whilst geo-political worries still remain in respect to Iran, North Korea, and of course, acts of terrorism which can create periods of nervous tension.
But of course, from a market perspective have we now reached the pinnacle of “irrational exuberance” even some investors appear to be piling into junk bonds, some of the riskiest bonds sold by companies. This sort of action does seem to indicate that investors are happy to bet that US president Donald Trump will deliver on his copious policies, and admittedly, embracing risk has delivered the biggest returns in recent times, but is it sustainable.
“The leading central banks around the world have a difficult task ahead of them”
Sadly this can only continue if central bank policy, and political guidance, steers us on safe passage through a repetitive inexact world. Obviously, the leading central banks around the world have a difficult task ahead of them, as they withdraw from their quantitative easing programmes, apply the brakes carefully on fiscal tightening, knowing that we do live in an indebted world, and dovetailing their fiscal policies against some extreme political policies.
Clearly, looking from a stock market perspective, whether it would be in equities, or bonds, a “quick fire sell off” cannot be ruled out over the coming weeks, especially, if a sudden shock, or short-term disappoint were to appear, such as the US administration were unable to get Capitol Hill to agree to some of the presidents promises, for instance, it were to take longer than was expected to implement the proposed tax reforms and it dragged on into the second half of 2017, or even early 2018, that indeed might frustrate the market.
But in the meantime, share prices continue to make new highs, whilst volumes die, and that is by no means a good sign. Indeed, even volatility, measured by the Vix Index, has been rather compressed recently, which normally means that it will soon find a way to go up, in fact, with the markets pricing everything to perfection, and little room for disappointment, this Index could rise quite quickly on any unforeseen negative events or bad news.
“US stocks and industrial commodities continued to surge”
Therefore, investors need to be mindful as they continue to climb the wall of worry, on anticipation that perhaps it’s different this time around, but of course, it never is, it’s just that irrational exuberance and sometimes panic buying tends to take over from sensible decision making which can be a sign that we are nearing the top of this current upward trend, but perhaps not the bull market.
And so moving on to last week’s events, US stocks and industrial commodities continued to surge after global investors renewed their bullish appetite for risk assets, encouraged by Donald Trump’s latest economic promise, China’s recent better-than-expected trade data, and optimism about US corporate earnings.
Even the news that Greek debt had sold off sharply, amid fears that Athens might have a genuine problem in securing the €7.0 billion loan it will shortly need to avoid bankruptcy, or indeed, that if Marine Le Pen’s National Front Party gets into power in the approaching French elections that they intend to re-denominate €1.7 trillion of French public debt back into francs did not deter the markets from upholding their bullish stance.
On Wall Street we saw US equities rally on the back of the impending Donald Trump tax announcement, whilst in the UK mining and metal prices helped to lift the FTSE 100 Index. Similarly, in Europe gains from resource stocks, and some surprising corporate earnings numbers helped to offset some weakness in Italian bank shares. Then looking at the Asian markets Japanese shares were helped by the further rise on Wall Street and a softer yen.
Clearly the markets can continue to rise, but they are becoming quite stretched on valuation grounds, and therefore, vulnerable to a meaningful pull-back of maybe 6 to 10 per cent, but that’s not to say that in such an event we would not see some new buyers appearing on the horizon, especially, when there is still a significant amount of money still sitting on the sidelines, suffering from the absence of a meaningful return.
Peter Lowman Chief Investment Officer
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 a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .