Market Commentary – 04th April 2018
And into Q2… With the emphasis on the US…
With the calendar turning to April, it’s time to shake off a forgettable quarter. During the period stocks suffered their first quarterly loss in more than two years amid heightened volatility, the US economy’s growth engine has sputtered, and tensions on the domestic as well as the geopolitical fronts has ramped up considerably. If the headwinds are turning to tailwinds, as new Fed Chairman Jerome Powell recently opined, their positive effects have yet to materialise.
That said, the quarter did end on an upbeat note, as US stock prices rose in the final week of March and market participants found the latest news out of Washington to be far less upsetting than the barrage of ominous tweets, threats of a trade war and the upheaval among the president’s policy advisors that dominated headlines in recent weeks. Indeed, trade tensions were dialled back somewhat this week, as the administration apparently struck a tentative deal with South Korea regarding steel imports and hinted at a more conciliatory approach towards redressing the U.S. trade imbalance with China. As we have frequently noted, the increase in protectionist sentiment in the administration, which heightens the prospect of a trade war, is a major threat to the U.S. as well as to the global economic outlook. Anything that tamps down that prospect is eagerly embraced by the financial markets. No doubt, the calmer news on the trade front contributed to the positive tone this week.
From the lens of economists and market makers, the stage is set for a modest rebound in the US’s economic growth over the remainder of the year, and the steady improvement could well extend the current upturn into the longest on record should it last beyond mid-2020. The major risk to the outlook is a policy misstep, either from an aggressive foreign posture that leads to a trade war, or worse, or from the Federal Reserve. The former is almost impossible to predict, given the chaotic reshuffling of policy advisors and a president that is inclined to spontaneously react to perceived and actual events. The recent deal forged with South Korea on steel, for example, was quickly put on hold as a bargaining chip to influence the upcoming meeting between the two Korean leaders. It’s still an open question as to whether Trump is prepared to pull out of Nafta and the Iran nuclear accord established under president Obama.
Economists have more confidence that the Federal Reserve will follow a more predictable path that will not derail the expansion in the foreseeable future. So far, the gradual rate hikes put into effect have been appropriately aligned with evolving economic and inflation trends. There are doves who would like to see the Fed slow down the pace of future increases as well as hawks who would prefer to step up the pace to short-circuit an inflation outbreak. Both camps have valid arguments, but there is still not a compelling case that the Fed is either falling behind or is too far ahead of the curve. At this juncture, the planned path of three rate increases this year seems about right, although we believe a fourth will be needed to lean against an unfolding fiscal stimulus that will spur stronger growth than the Fed expects.
As we highlighted last week, we will be conducting our rebalance today by adding the excess cash we made in our portfolios in February and investing it into the FTSE 100 index passive tracker. The cash we held at this point was held until we saw a buying opportunity in the markets and we have analysed the fundamentals and are now ready to invest the excess cash into the index.
The index is highly correlated to the currency markets and sterling / dollar is a major influence to the equation and has an inverse relationship. At this very moment, the FTSE 100 is at a low level and GBP/USD is at an elevated level (post Brexit referendum). We haven’t really heard much from the Prime Minister recently with regards to what direction the negotiations are taking place and any developments, if any, are in the pipeline. Currency traders seem optimistic at this stage and based on the lack of news and this has brought the pound up. We anticipate this is short lived with the Brexit deadline of March 2019, we must hear something soon. Based on this it is apparent that the news will not be all rosy and FX traders will drive back down the value of Sterling and with this, increase the FTSE 100 as the constituents of the index are able to trade at cheaper levels from a purchasing power perspective and a purchasing power parity perspective abroad. The passive instrument will be added to the model portfolios as from today to benefit from the above and also based on the fact that the FTSE 100 is below average and where it should be.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track give us a mixed picture. We have seen the US mostly down. This has replicated itself into Asia, however the rest of the world has been relatively flat on the upside. One key index that stands out is the FTSE 100 which has been up over 2% over the past week. This is largely due to sterling being high against the US Dollar, again being driven by the weakness in the US Dollar.
It is without a doubt that we are seeing a lot of red in the markets, however if we see the pace of growth and downfall, it is fair to suggest that in this late stage of the economic cycle, volatility is high. Again, our model portfolios are holding up well in this period of high volatility with the actives relatively flat on the downside and passives in line with the indices which have benefited from the volatility. The equity / non-equity split in the portfolios have been well diversified and gives our strategy of cyclically adjusting the portfolios a positive spin to the markets. Having said this, we do expect volatility to continue to be high in the late stage of the cycle, however we have adjusted our model portfolios in line with the rebalance today to take advantage of the movements in the market.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1850, Los Angeles becomes an American City. Settled for millennia by Native Americans, then claimed by the colonial Spanish, and later by Mexico, the dusty ranch town is officially incorporated as the city of Los Angeles. It will go on to be the second-most populous city in the United States.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager