Economic focus

Brian Tora, Chartered Fellow, CISI, Consultant to JM Finn

Seldom have there been so many things going on that could have a crucial effect on the way in which markets perform.

There will be a general election here shortly, to be followed by some serious Brexit negotiations, the Trump administration appears in serious disarray, debt around the world could be stoking up problems for the not too distant future, as Simon Rose points out in his guest editorial, quantitative easing appears to be approaching the end game and geo-political hotspots are not getting any cooler.

Yet markets are behaving in a relatively robust fashion. By mid May the MSCI World Index was hitting new highs. Our own FTSE 100 Share Index broke through 7500 at around the same time, while the S&P 500 Share Index also achieved new peaks. Even Europe has been enjoying a better time of it recently, marketwise, and the expected hit to emerging markets in the wake of the Trump victory has failed to materialise.

It is worth trawling through all these seemingly conflicting scenarios to try to determine whether we are still in the upward trend of a bull market or if a fool’s paradise is a better description of current market conditions. There are some encouraging signs around for a start. The retail sales figures for April were way above expectations, so the expected hit to consumer confidence brought about by a weaker pound squeezing expenditure has not yet occurred. 

Also, volatility is low and has been so for some time. This is measured by the VIX index, also known as the “Fear Index” – the title of a book by Robert Harris that does not make comfortable reading for technophobic investors. In a way this is surprising, given the imponderables that face us at present, but it doesn’t suggest we are about to fall off a precipice. As for our upcoming election and EU exit discussions, the rest is too soon to allow sensible comment, as John Royden has pointed out, while the second will drag on for some time before we get any indication of the influence it will have on our economy. 

The expected hit to emerging markets in the wake of the Trump victory has failed to materialize 

Perhaps it is the troubles facing Donald Trump that are the most difficult to gauge. So far the record is not looking too reassuring, but that may not necessarily be bad for shares. The initial belief was that he would be pro business and thus good for the market, but getting his measures through the two Houses in Washington is beginning to look a tough call. While Obamacare does appear to be on the way out, tax cuts and infrastructure spending are still far from certain. However, on the plus side the more extreme approaches appear to have been kicked into the long grass, with a degree of cosying up to China and the apparent abandonment of quitting NAFTA.

This may have implications for some sectors of the US market, but not for all. Technology stocks have been in demand, probably because they are not so focused on the domestic economy. Also, the decline in the dollar as a consequence of the political problems faced by the President, most notably over relations with Russia, could be of benefit. So far economic growth is holding up and inflation appears to be moderating, so perhaps investors’ apparent calm has some foundation. 

Meanwhile, there is a growing feeling that the Fed will have to remain dovish while the future outlook appears so uncertain, so perhaps there will not be so many rate rises in the offing as expected. The European Central Bank is also considered likely to maintain its slow and steady approach, despite signs that a cyclical economic recovery in the Eurozone is underway. Perhaps quantitative easing will continue across the Channel after all. 

Debt is more of a worry, particularly if the unwinding of Quantitative Easing pushes interest rates up, but we live in a global village these days, so international cooperation could help moderate the consequences. There is also some evidence to suggest savings rates are actually quite high around the world, while it is worth reminding ourselves that there are still ambitious and hard working young people in the developing world anxious to gain a standard of living comparable with that which we enjoy in the West. 

Geo-political upsets are, of course, impossible to predict. Korea, Syria, a major terrorist attack on a western city – any of these could undermine sentiment. The underlying picture, though, is not one of investors fooling themselves. Rather there seems the feeling that if things go wrong we will muddle through – and they might not go wrong. I hope the latter is true, but remember too JK Galbraith’s comment on economic forecasters. They fall into two categories – those that don’t know and those that don’t know they don’t know. 

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