October 2017 – bucking the seasonal trend
Historically October hasn’t been a good month for markets. There’s a famous line in Mark Twain’s ‘Pudd’nhead Wilson’ that goes like this:
“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
It’s true that some nasty stock market crashes have happened in the autumn, for example there was the Great Depression of 1929, followed by Black Monday in 1987 and, more recently, the global financial crisis of 2008.
There is indeed some evidence of seasonality in investing. Now and again ‘Sell in May and go away, and come on back on St. Leger’s Day’ (which is in September) definitely works as an investment approach. The difficulty is that these phenomena aren’t apparent every year, and after the cost of buying and selling stocks is taken into account, there’s little evidence that it’s a consistently profitable exercise.
At Standard Life Investments, we prefer to focus on economic and company fundamentals, our analysis of politics, and a good understanding of how markets value businesses. At present, we’ve remained heavily invested in global equities in October. This is partly because the markets are starting to look forward to possible tax cuts in the US, which could boost profits.
Why we still like US equities
Tax cuts are top of the political agenda in the USA at present. There are many hurdles to cross for the US and for the Republican partly in general. The Trump Presidency in particular needs some form of legislative success before the mid-term elections in autumn 2019. After all, healthcare, the wall, trade and migration matters have become much more complicated issues or embroiled in difficult discussions in recent months. So, Washington is trying very hard to pass some form of tax cuts by next spring – not tax reforms, as the money is just not there to finance anything too aggressive.
There’s also been considerable speculation in financial markets about the next Fed Chair. President Trump has considerable opportunity to alter the balance of the Fed between doves and hawks. Markets were reassured that Jerome Powell is scheduled to replace Janet Yellen in this role, as he’s seen as the continuity candidate.
With so many competing factions within Congress, an early resolution to any of the hurdles facing the US and the Republican party would be surprising. The stock markets have not yet priced in any major changes, especially in reference to tax cuts, so it’s one of the reasons why we like US equities in our holdings.
UK markets and interest rates: now and in 2018
It’s no surprise that the Bank of England raised rates at the Monetary Policy Committee’s (MPC) meeting on 1 November. But it’s a change that markets had priced in based on recent economic data and speeches from many of the MPC members.
The key issue for the markets will be how far and how often the Bank of England moves interest rates in 2018. Here the debate is really rather wide. There are different views about a number of factors, including:
- the impact of Brexit on confidence
- the boost from global trade
- fiscal changes in the Budget
All in all, we expect another move by the Bank in 2018 but it’ very data dependent.
For example, the Bank’s worried about levels of consumer debt and has encouraged the banking system to lend more cautiously. However, Brexit uncertainty does appear to be affecting business confidence and so capital spending. The UK looks to be a slow-growing economy for some time to come.
Prospects remain good for solid economic expansion in 2018
While media headlines highlight political uncertainty that’s affecting individual countries, our fund managers take this into account through their stock selection. In our view, there are still prospects in emerging market equities and selected emerging market debt too. Obviously though, there have been apparent risks for some time. Markets would be concerned by any combination of an aggressive Federal Reserve, a sharp appreciation of the US dollar or a much weaker situation in China.
However, the backdrop of an expansion in global economic activity in general, and regional trade in particular, is very beneficial for emerging market assets. Our analysis has indicated that financial imbalances in many, not all, emerging markets have improved. Putting aside a situation such as military conflict in North Korea, we see the prospects remaining good for a solid economic expansion around the world into 2018.
November Budget – what can we expect?
There’s always a lot of speculation in the run-up to any Budget, and this one is no different. It must be remembered that although the government’s borrowing requirement is better than previously expected by the Chancellor, the UK is still borrowing a large amount each year. A lot of this is from overseas investors attracted by the high yields on UK government bonds (gilts) compared with overseas markets.
In addition, the pressure on the government to spend more money on the NHS, defence, housing and so forth is stronger than ever. There are rumours that we’ll see some form of change to pensions or allowances again – but that remains to be seen.
1825 will be watching the Chancellor’s announcements on 22 November and will update you on the main points that could impact your finances.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding in November 2017.