2017 was a bumper year for global stock markets. Investors shook off pessimism about growth and focused instead on the fact that the world was experiencing a period of synchronized economic expansion. Tax cuts passed by America’s Congress in December were the icing on the cake, boosting both the American economy and payouts to the shareholders of multinational firms.
This year concerns come to the fore as Central banks are starting the long-announced withdrawal of some of the monetary stimulus that has supported the market rally since 2009. After the “volatility vortex” in February, sparked by worries about inflation, markets have thrown a “tariff tantrum” after President Donald Trump sparked fears of a trade war with China. The changes of tone from the White House have been so rapid that you might think policy decisions are controlled by the toss of a coin.
In February stocks sank on heavy hints of American levies on imported steel and aluminum. The prospect of trade measures against China, again hit shares. Then reports that China and America were making progress in trade talks caused the S&P 500 index to rise by 2.7%, its best day since August 2015. It promptly fell again by 1.7% thereafter.
Further volatility seems likely, after the appointment of John Bolton, an ultra-hawk on foreign policy, as Mr. Trump’s national security adviser.
The prospect of further interest-rate increases has taken its toll on bank stocks, with America’s Bank index dropping by 8% in one week alone.
The price of copper, a commodity that is particularly sensitive to economic conditions, has fallen by 9% so far this year.
The technology sector has also taken a hit. Controversy over the use of Facebook data in the 2016 presidential election prompted a reversal. Fears of extra regulation caused more losses. The index has dropped by 5.2% in March. President Trump ratcheted up the rhetoric on Amazon, attacking the company’s business practices and suggesting that it is in part responsible for massive losses at the US Postal Service. Amazon was down over 5% during one session alone.
All this has taken a toll on sentiment. Investors and strategists have become less confident about the economy. Responses generate only a 43% probability of the business cycle being stronger a year from now. That is down from 55% in the first quarter of 2017. Investors think there is a 58% probability that equities will be higher a year from now. But that is not particularly optimistic. American shares rose in 64% of the years since 1926.
These signals are likely to turn out to be false alarms. The overall outlook remains supportive of financial assets, in our view, with growth dynamics around the globe still largely unaffected by recent trade rhetoric. With corporate earnings still poised to rise sharply in the aftermath of tax reform, we look for equity markets to continue to move higher. Expect some Presidential tweets to unsettle the markets every once and so often. When this happens, long-term investors buy the dip.
Switzerland, April 6th 2018