New highs amid rising inflation and irrational exuberance
The "Trump is good for growth" phenomenon picked up pace during February, driving stock markets in the US and UK to new highs. Positive sentiment bordered on the absurd when shares rallied after Trump's speech to Congress, not for the detail of his tax and spending plans, but because he "sounded more presidential". Leading markets gained between 2.5% and 5% in sterling terms, while UK gilts also rallied over 3% despite further evidence of rising inflation.
Shares rally on sentiment, not substance
The "Trump is good for growth" phenomenon picked up pace during February, driving stock markets in the US and UK to new highs. Positive sentiment bordered on the absurd when shares rallied after Trump's speech to Congress. Instead of reacting negatively to the lack of detail in his plans for tax cuts and fiscal spending, investors were encouraged because he "sounded more presidential".
Leading stock markets gained between 2.5% and 5% in sterling terms. US stock market gains of 5% also reflected a stronger dollar over the month. Shares in the UK rallied by around 3%, Europe was a touch less, Asia and emerging markets a touch more. More bemusing, given further evidence of rising inflation, was the strong performance of fixed interest bonds: UK gilts were over 3% higher by the month-end.
The Fed hints at March while Europe and the UK hold steady
Members of the US Federal Reserve were busy dropping their strongest hints yet that the next rise in interest rates could be announced in March. With the market attaching a probability of over 90% to this action, it would have seemed foolish to spurn the opportunity, and failing to act might even have spooked investors that the Fed knew something they did not.
Both the UK and European central banks voted in favour of maintaining accommodative monetary policy, choosing to "look through" short-term overshoots in inflation. In the case of the UK, concerns remained that Brexit uncertainty would lead to a slowdown in growth, supported by recent forward-looking data. The European Central Bank wanted to provide stability throughout the course of European elections that year.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The market can remain irrational longer than you can remain solvent
The great economist John Maynard Keynes once said that "the market can remain irrational longer than you can remain solvent". By historic measures, stock market valuations, in particular the US, looked excessive. This did not mean a crash was imminent: prices could continue to rise for many months. But given that we had no privileged insight into timing, it did suggest that a more cautious approach was sensible.
Accommodative monetary policy in Europe, the UK and Japan continued to provide a comfort blanket to investors. The question was, with rising inflation and buoyant economic data, how long this could continue.
Headline inflation was now at, or approaching, levels that either required a tightening of monetary policy or an explanation as to why central banks were prepared to "look through" current data. In the US, the Federal Reserve looked certain to increase rates in March, and investors appeared happy with that. The current "glass half-full" interpretation was that economic growth must be strong if the Fed were happy to act. The European Central Bank was mandated to target inflation at "below, or close to, 2%". With EU inflation bang on 2%, and forward-looking business data at the highest level for over five years, the debate over the need to change monetary policy was likely to heat up, especially from the German end.
In addition to a likely US rate hike, March would bring the UK Budget, elections in the Netherlands and the strong likelihood of Theresa May triggering Article 50 to begin two years of negotiations to leave the European Union. Our impression was that there was now less cash on the sidelines to be invested on set-backs, although so long as interest rates remained at record lows the search for higher income would remain.
The great economist John Maynard Keynes once said that "the market can remain irrational longer than you can remain solvent". By historic measures, US stock market valuations look excessive.
Our portfolios retained a cautious profile. Whilst this detracted slightly from the month's performance, it was a view that we remained comfortable with.
Cautious profile maintained
Our portfolios retained a cautious profile. Whilst this detracted slightly from the month's performance, it was a view that we remained comfortable with.
Additional bond fund paying off
The recent addition of a further bond fund to our cautious portfolios bore fruit over a month that saw strong performances from fixed interest bonds. We still preferred equities to bonds over the longer term, but felt that in the near term there was a risk that markets had overshot and that a correction in equities could send bond yields lower.
Diversified and ready for a volatile year
Greater uncertainty over wider geopolitical issues and a global mountain of debt meant that we anticipated an interesting and possibly volatile year ahead. Events the previous year had highlighted the benefits of holding a robust, diversified portfolio over the costs of taking bets on major outcomes. We maintained our diversified portfolios with the capacity to take advantage of opportunities when they became available.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →