Warren Buffett’s comments in Berkshire Hathaway’s latest annual report reiterate his sage advice that investors should not invest in anything on a time horizon of less than 10 years. That message underscores the attractions not only of nascent sectors such as artificial intelligence, robotics and food tech, but also of the growing emerging economies that will eclipse today’s biggest markets in the not too distant future.
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The rally in the first quarter lifted the US and other markets to a six-month high, while sovereign bond prices have mirrored investors’ renewed confidence by tumbling from their recent two-year peak. The uber-pessimism of the fourth quarter of 2018 has turned into fresh hope that gains can be made when trade wars and Brexit have been pushed out of the way.
Stockmarkets around the world enjoyed their strongest start to a year for three decades. The S&P 500 index rose 7.8% and 3% in January and February respectively, the best first two months of any year since 1991. That run was broken in the first week of March, as stockmarkets fell on disappointing economic news, particularly US jobs data, downward growth forecasts from the OECD, and the announcement that the European Central Bank feels the need to launch fresh stimulus.
Stockmarkets surged at the start of the year as they bounced back from their December lows. Progress through February has been volatile, but the upward trend continues, despite major macro concerns.
Just one piece of encouraging economic news – the December US jobs report – was all it took to change the market’s mood and send stocks higher in the first few days of the New Year; but this recovery could easily prove a brief respite.
It would be easy to imagine that the US/China trade war and the US Federal Reserve’s resolve to tighten monetary policy, which have been the two big fears hanging over the US stock market throughout 2018, are reaching some sort of stasis. The market certainly rejoiced when Fed chairman Jay Powell made the dovish comment that interest rates are “just below” the range of rates considered neutral. The Dow Jones Industrial Average index shot up by 600 points in one session, its best single-day gain since March.
This article was written in early November for the December 2018 print edition of Money Observer. Market data and share prices are likely to have since changed.
The big news this month has been the climb in US 10-year Treasury bond yields to 3.2%, their highest level since July 2011. Bond yields had been rising gently (and their prices falling), reflecting confidence that the US economy was robust enough to weather trade wars and other setbacks. However, the rise has spooked markets, forcing a reassessment of risk-free assets compared with equities.
US equities defied logic in August by climbing 3 per cent, despite the rise in the federal funds rate. The S&P 500 index has now risen by 230 per cent since 2009 – the longest bull run in history – and has a price/earnings ratio more than 50 per cent higher than its historic average.
Far from a quiet summer lull, volatility and risk-aversion intensified over the holiday season. At various times the FTSE 100 index tumbled over 100 points in a day, as markets became nervous about the Turkey crisis and deepening trade wars. US Treasury Secretary Stephen Mnuchin is warning of further sanctions to hamper Turkish competitiveness, unless pastor Andrew Brunson is released from house arrest on espionage charges. It is a row that could easily escalate.