An update on the markets from Brian Tora and our investment partners JM Finn
It has certainly been a difficult start to the year for markets. In our last update we described 2017 as having been a year for the risk takers – by contrast, in 2018 the reverse has been true. All major global equity indices have fallen over the last three months, as have many other asset classes, from sovereign bonds to Bitcoin (the cryptocurrency) and prime London house prices. Within the context of stock market history, the market decline seen in early 2018 has been relatively modest and in fact marks a return to more normal conditions after the extraordinary run of gently rising markets that we enjoyed since mid-2016. At the time of writing, the FTSE All Share is down 8% year-to-date, with dollar weakness against sterling having been a particular headwind for FTSE companies that generate a large portion of earnings overseas. UK markets are now broadly back to levels where we were in February 2017, but still up 13% over a two year period; the market has stumbled but is not far below all-time highs reached only a few months ago.
So what spooked the market? The trigger came at the start of February when US jobs data showed a surprise spike in wages. Higher pay may be good news for Americans but investors worried that this was a sign that the long-feared increase in inflation was upon us and that, in turn, central bankers would be forced into raising interest rates in an attempt to stop prices from overheating. Given that stock markets have been underpinned by low interest rates and few surprises from central banks for many years, it is understandable that markets reacted cautiously to the February US numbers. The March US wage data subsequently went some way to calming inflation fears, as the wage growth figure dipped back to more normal levels. However, markets did not rebound back to previous highs on the news and this appears to be down to two principal factors.
Firstly, technology giants (namely the famous FAANGs – Facebook, Apple, Amazon, Netflix and Google) have seemingly hit a bump in the road, for now at least. The FAANGs were the leading light for markets in 2017, but recent reports such as data breaches at Facebook and fatalities due to autonomous vehicles have rattled confidence in the sector. These companies have already drastically changed the world we live in and seem likely to continue to do so, nonetheless with innovation there will of course be challenges along the way.
Secondly, investors have become increasingly nervous of politics disrupting the global economy. At face value not a great deal has changed since 2017 – Trump, May, Merkel, Putin, Xi Jinping and Abe are all still in office and headline economic data continues to indicate relatively strong synchronised activity. Nonetheless, investors have recently concentrated on seeming political instability and stuttering momentum in various economic indicators. Benjamin Graham famously stated that ‘In the short run, the market is a voting machine but in the long run it is a weighing machine’. By this he meant that markets can be fickle over shorter periods and will move between fear and greed, but he believed that ultimately market prices tend to converge on reality.
This seems appropriate in the context of how the market has reacted to Donald Trump – three months ago markets were excited by the potential upside from tax cuts and infrastructure spending, now they are worried by political infighting and trade wars. We certainly cannot tell how successful policies such as Trump’s will be, but we can tell you that markets are unpredictable short term and will continue to be so. Though, as always, volatility provides opportunities for patient investors.
Brian Tora, who is a respected writer and broadcaster on investment issues, is a consultant to JM Finn & Co. Brian has enjoyed a long and distinguished career in the City. Any opinions expressed are his own and should not be construed as advice from JM Finn & Co or UNIQ Family Wealth. A version of this article may appear elsewhere in the press.