The US will heavily influence the future direction of stock markets

Rowan Dartington’s Guy Stephens

Investors shouldn’t be too self-obsessed with the UK’s political challenges - the markets, as ever, will be influenced by the US, writes Guy Stephens, technical investment director at Rowan Dartington.

It is small wonder the developed world is sick and tired of politicians and the related media obsession. The UK election result was a fantastic display of the fundamental problem with today’s political system - a complete disconnection between those who attain power and those who put them there - and we have seen it throughout the developed world. 

The reason, which many politicians are yet to wake up to, is social media and the speed with which every utterance and action goes viral.  This means that the individuals in power very quickly become the news, whether it is a mistimed high five from Jeremy Corbyn or an examination of the amount of make-up there is concealing Theresa May’s emotional state.
 
Unfortunately, it looks like political spin and the related media obsession are here to stay, but, reassuringly, I think the markets are already there in terms of judging much of it as irrelevant. 

For me, it is time to move on and focus on the fundamentals once more. Currencies are sensitive to this noise, but it looks like political turmoil is the new norm, or rather the power of social media to embarrass and frustrate those in power and constantly raise the question of their longevity. 

The UK is now facing an extended period of political squabbling as the government’s opponents scent blood.  The first instalment of Prime Minister’s Questions in the Commons is going to be brutal and certainly newsworthy with all the subsequent analysis. 

The Brexit talks will only exacerbate this, with every move and comment scrutinised.  Ironically, the election outcome significantly strengthens the hand of the EU when it comes to media statements concerning the competency of the UK’s approach. Theresa May has set her stall out as the Queen of Brexit, but this is a crown that will inevitably slip and could dramatically crash to the ground as the EU start throwing rocks at Downing St.  This is the only card she has left to play and no one else wants to pick it up for now.

The US will continue to be the biggest influence on how global stock markets perform

Putting aside the new political realities for the UK investor, the markets, as ever, are going to be influenced by the US and we should not become self-obsessed with our own challenges.  Whilst there may be a huge question mark hanging over Trump’s policies and what he may or may not get through Congress, the reality is that even if he fails to deliver anything substantive, economic growth should remain at around 2 per cent, inflation under control and unemployment at record lows. 

- Trump won, so why haven't stock markets crashed?

Yes, the US market looks expensive on most measures, which translates into a general view that global equity markets look expensive, but this is unsurprising given the low returns available elsewhere, the relative stability of the global economy and the liquidity looking for a home.
 
Many readers will be able to empathise with a current investment strategy of keeping some cash on the side at the moment.  However, the mind-set for doing this is to take advantage of a sell-off, to buy the same assets at cheaper prices - hopefully much cheaper if there is a major event. 

The problem with this is that everybody else is also doing it, which is why there is no significant selling pressure when a potential volatility-inducing event occurs, such as the return of a minority government in the UK.
 
The most important economic metric for me is the US unemployment measure, which stands at record lows below 5 per cent.  There have been three instances historically when this has occurred, and all three have been a precursor to a major negative economic event. 

This involved rampant inflation in the 1970s, the millennium technology bubble and credit crunch of 2008.  These were all events that occurred during a period of bountiful economic growth and robust stock market confidence, if not euphoria, accompanied by full employment.  In today’s era of record low unemployment, there is no evidence of any of these characteristics as yet. 

Little chance of recession hitting US economy

If Trump’s reflation trade was implemented to its fullest extent, then we could see this in a few years’ time following a period of strong economic growth. But whilst consumers are restrained and concerns widespread, there is little chance of a major recessionary shock to the US economy.  Confidence is fragile and speculation muted.
 
So, by all means keep some cash as ammunition in the hope that an expected opportunity will present itself, but anything more than 10 per cent of investible assets will be a drag on returns which may continue to grind higher as earnings grow into the current elevated market valuations.  The speech from Janet Yellen last week gave us a good idea of the Fed’s view on US growth coupled with a rate rise. 

In July, we will get the first evidence of any GDP bounce back from the weak Q1 – if expectations are met, we can be sure that this fully valued market will remain well supported, whatever the political noise.

 


Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.