Market Bulletin - Ageing bull?
America’s bull run broke new ground and the US signed a trade deal with Mexico, as the presidency was tainted by two high-profile convictions.
On Friday, the S&P 500 struck another all-time closing high – but the bigger story for the index was that, just two days earlier, it had clocked the longest bull run in its history; completing a 9.5-year run without falling into bear territory (defined as a drop of 20% from its last peak).
There were naysayers a plenty. The claim’s legitimacy hangs on how you define a bear market; by some counts, the longest bull market was more than 12 years long and ended with the bursting of the tech bubble in 2000. Still others argue that the current bull run is barely worthy of the name, at least for most of its history, given its reliance on central bank support, or the fact it began in the aftermath of a global financial crisis.
Yet beyond arguments over definitions, the supposed record-breaker at least offers a chance to pause and reflect. The current bull run began in March 2009 with the S&P 500 at just 666 points. It ended last week above 2,860 points. That’s a rise of some 330% in just nine-and-a-half years. (Granted, it’s not Venezuela, where the national index is up more than 17,000% this year alone, but that’s because inflation is at 80,000%.) In short, the key question is not whether the current bull run wins the rosette, but whether you were saddled up for the ride.
“The reality is that broad economic growth is driven by companies,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “To tap into that effectively over the long term, you need to be significantly invested in equities.”
For UK investors, today’s bull run also offers a reminder that, since the best returns are not necessarily at home, geographical diversification offers the best way to avoid missing out; perhaps also, that it’s a brave investor who bets against the US.
As the record has approached, some have expressed their fear that the run is overextended and surely due to expire. Yet bull runs often die after a bout of over-exuberance, not simply because they’ve run out of puff. Some of the usual signs of a bubble – surging asset prices, high volatility, a rash of IPOs – are not flashing red. Indeed, the great cliché about the current bull run – that it is “the most hated in history” – may signal that euphoria has not yet banished prudence.
Last week, as he faced growing pressure over the sentencing of his lawyer and former campaign manager for fraud (among other charges), the US president claimed credit for the bull run (although more than 80% of it took place during the Obama tenure) and warned on Twitter that “if I ever got impeached, I think the market would crash”.
He was responding to news that Paul Manafort, his former campaign manager, had been found guilty on eight counts of bank and tax fraud; and that Michael Cohen, his former lawyer, was likewise found guilty on eight (not identical) charges. Crucially, Cohen implicated the president in a federal crime, significantly raising the stakes for Donald Trump, who has since denied culpability.
Although the odds of impeachment rose last week, it remains very much an outside shot, given the high bar set by the US’s constitutional arrangements to push it through Congress. Markets appeared relatively unruffled by the shortening of the odds. In part, this could reflect its ease with the prospect of Mike Pence, the vice president, taking over instead. (Or perhaps, of course, it doesn’t think Trump is as important to the stock market as the president himself does.)
Indeed, it was the president’s trade policy that appeared to carry greater sway on markets, as the US imposed a further $16 billion in tariffs on Chinese imports, and Beijing responded in kind. Trade talks between the two ended on Friday without real progress, making an escalation plausible.
“A more protectionist stance from the US, especially when it leads to retaliatory measures from China, could lead to weaker global trade growth, and so that is a real risk that we monitor closely,” says Johanna Kyrklund of Schroders, lead manager of the St. James’s Place Managed Growth fund.
However, on Monday this week, the US and Mexico confirmed that they had agreed a successor deal to NAFTA. Attention will now turn to whether all parties can find an arrangement that allows the deal to extend to Canada too.
Meanwhile, on Friday, Donald Trump said he was “not thrilled” about the Federal Reserve’s 2018 rate rises, shortly before leading central bankers from around the world were due to gather for their annual powwow in Jackson Hole, Wyoming. Many were watching for indications from Jerome Powell, Fed chair, of policies on both interest rates and quantitative tightening. If inflation pushes the Fed to raise rates further, it has global repercussions, not least in emerging markets, which are already feeling the adverse effects of a stronger dollar. In the event, Powell said: “I see the current path of gradually raising interest rates... We have seen no clear sign of an acceleration above 2 percent”.
One currency to have slipped against the greenback this year is the pound, buffeted by political instability and trade uncertainty. Last week, however, the government received a strong dose of good news: government borrowing has tumbled by two-fifths over the fiscal year – just £12.8 billion over the period as against £21.3 billion for the same period last year.
“The biggest July budget surplus since 2000… should give chancellor Philip Hammond some room to manoeuvre in the autumn budget,” read a report by Capital Economics. “He should be able to deliver the extra funds [pledged] for the NHS without compromising his fiscal target or having to find savings elsewhere.”
The FTSE 100 ended the week slightly up, helped in part by oil majors Shell and BP. The price of a barrel of Brent crude remains high – and ended the week above $75. Yet the chancellor may be eyeing the North Sea enviously, aware that billions in tax revenue will be missed this year due to cuts introduced under his predecessor. He may even be tempted to tweak arrangements.
The government also went onto the front foot, publishing its first two dozen advisory papers for a no-deal exit from the EU. These laid out how to deal with everything from organic farming exports to nuclear fuel and Danish sperm imports. They also confirmed businesses will use the same customs rules for EU–UK trade as for the rest of the world.
Pain in Spain
One area raised in the Brexit papers was retirement saving. UK citizens who have worked in EU countries and built up pension funds abroad face losing access to their pensions in a no-deal scenario. Similarly, it may prove illegal for UK citizens who retire to an EU country to have a pension paid to them in the domestic bank account of their current resident country.
Dominic Raab, Brexit secretary, said of the likely no-deal plans: “There are risks here but let’s not have the[m] ... blown out of proportion”. Figures from the Office for National Statistics show that 900,000 Brits currently live elsewhere in the EU.
Schroders is a fund manager for St. James’s Place.
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