Market Bulletin (18/07/2017)
Calendar creep
One hundred months, and still it goes on. The starting gates were opened on the current bull run on 9 March, 2009 and, as yet, it shows few signs of running out of puff. After rising another 1.3% last week, the S&P 500 began the weekend at yet another all-time high – the Dow Jones Industrial Average hit its own all-time high earlier in the same week. Count it however you like in terms of time – 8.3 years, or 3,052 days – the real lesson has been in the equity market gains.
Nor has the UK been excluded from the party. The FTSE 100 (up just 0.4% last week) has been on the same path – and has risen by more than 20% in the mere 55 weeks since the referendum result was announced. Historically, the average US bull market has lasted for 8.1 years and yielded a total return of 387%, according to a study by Newfound Thinking. At the upper end, the postwar bull market lasted 14 years (1947-61) and returned 913%.
In short, it is no wonder that some investors are nervous, and others have already taken flight. But it is also true that the only obvious lesson from recent experience is that it would have been damagingly expensive to stay out of the market in the days, months and years since March, 2009 – the mid-crisis low point. Time in the market has paid off, and royally so. With dividends reinvested, the S&P 500 has returned more than 300% over that period, according to Financial Express figures. Even allowing for a correction (which some investors fear), that’s a hard number to beat. Other indices have followed suit, of course, and last week was no different: the Eurofirst 300 gained 1.7% and the Nikkei 225 rose by 0.95%.
The longer a bull run continues, the more good news it needs to sustain it, or so goes the old wisdom. Yet the current run has already weathered quite a few wildcard shocks in the past year, among them the UK referendum result and the Trump election victory. Moreover, the S&P 500 set another record this year too: the highest number of hours an American has to work to buy a unit of the index. For almost 50 years it would have taken the average American worker around 26 hours – today that number is above 100.
In this light, the market’s particularly intent focus on central bank policy is understandable, since central banks have played an outsized role in boosting asset prices since the crisis. Last week, the inscrutable Janet Yellen, Chair of the Federal Reserve, offered no major clues on the likely timing of interest rate rises, but she did warn that the recent slowdown in US inflation was only “partly the result of a few unusual reductions” in elements of the consumer price index. In short, she is not certain that inflation will pick up once again – and figures released on Friday did show inflation in the year to June unchanged from a month earlier. Yellen added that she would watch “very closely” for signs of an economic slowdown. Markets took her words to mean that the Fed had turned a shade more dovish. The yield on 10-year Treasuries ended the week higher.
She will have plenty to watch in the coming weeks, as US companies announce their second quarter earnings. US bank earnings season began on Friday morning and early indicators were generally positive – JPMorgan, Citigroup and Wells Fargo all announced improved earnings. Investors seemed lacklustre in response, and bank stocks on the S&P 500 actually dipped in early trading on Friday. However, figures released by EPFR Global last week showed that there had already been significant investor inflows to both financial and technology stocks ahead of second quarter earnings announcements. Success may have already been priced in. Moreover, flatlining inflation (mentioned above) has slightly reduced expectations of multiple significant interest rate rises in the near term – rises generally make banks’ core lending business more profitable.
Balance sheet blues
The Bank of England offered similar hints last week, as the deputy governor told press that the central bank was “not ready” for a rate rise. However, another member of the rate-setting committee said that the bank should now consider unwinding its £435 billion of quantitative easing.
One of the post-crisis roles of the Bank of England has been to encourage banks to restore sanctity to their balance sheets. Earlier this year, it applied stress tests to major banks to see how their balance sheets would manage in a crisis. The results were in fact quite encouraging. Last week the Office for Budget Responsibility (OBR) applied a similar test to the government’s finances – and the outcome was much less reassuring.
The OBR said that the government would in fact have failed the same stress tests applied to the banks. Faced with weaker growth, higher interest rates and rising inflation, UK government finances would be on an “unsustainable path”. Borrowing would be £158 billion higher by 2022, and debt would be higher by 34% of national income. The OBR criticised the Conservatives, saying that, after seven years in power, they had left the finances “much more sensitive” to shocks. (The Labour manifesto was also criticised for limiting burden-sharing.)
Yet the government could take heart last week that unemployment fell to a 42-year low, with more than 32 million in work for the first time – and 74.9% employed. The negative news in the report, which was published by the Office of National Statistics, was that the squeeze on wage packets increased in May, courtesy of inflation outrunning wage growth.
Philip Hammond used the debt figures to re-broadcast his message that the UK finances still need serious action, despite the apparent austerity fatigue expressed at the ballot box. Yet the government has largely avoided making economic policy announcements since the election. An exception last week concerned the money purchase annual allowance; the amount that those already taking benefits flexibly can contribute tax-free to a pension. Some had hoped that the pre-existing plan to retroactively apply a reduction in the allowance from £10,000 to £4,000 for the current tax year wouldn’t survive the hung parliament. Unfortunately for them, the government last week confirmed that it would indeed be retroactively applied. It only remains for it to be passed as part of the summer Finance Bill, a vote likely in October.
There were early signs last week that UK corporate earnings might yet please markets in the coming month or so. Robert Walters, the recruitment consultant, said that companies in financial services and IT, as well as small businesses in London, had returned to normal hiring rates, having increased rates since their post-referendum lull. Barratt forecast modest growth in housebuilding, with an improved profits forecast, and Burberry announced strong sales figures. There was less good news from Carillion, as the construction group offered a profit warning and said its debts had become far too large. Meanwhile, Pearson sold its 22% stake in Penguin Random House to Bertelsmann, giving the latter 75% control, and helping Pearson to improve its balance sheet and reorient away from traditional media.
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