Review of the week: Unmoored

US stocks posted their strongest first-six-month performance in decades this year. This boom is a bit incongruous considering many of the risks that have dogged investors in 2019, notes our chief investment officer, Julian Chillingworth.

Despite a revolving door of concerns, mixed data and rising risks, US stocks have soared in 2019. After the US Federal Reserve (Fed) cleared the way for a rate cut this year, investors’ imaginations ran away with them. Despite the Fed forecasting just one 25-basis-point decrease in its benchmark interest rate, the market is now implying three rate cuts in the second half of 2019. That may turn out to be pretty optimistic (or pessimistic, depending on how you assess the world).

Much of the time these days, monetary policy appears to be less influenced by the real economy. The Fed seems to be much more sensitive to whether the S&P 500 Index is rising or falling. Nowadays, cuts to interest rates are a happy occasion, despite the fact that they should correspond to an economy that is starting to struggle. Rate hikes give everyone the heebie-jeebies, even though they should be driven by a stronger commercial environment that is good for businesses and households alike. In the first half of the year the S&P 500, spurred by the Fed, rose 17.3% in dollar terms, the best start to a year since 1997.

While stocks were soaring to new record highs, American company earnings fell 3% on the previous year. Eighty-seven S&P 500 businesses issued negative earnings per share guidance at the end of June, the second-highest number since 2006. This ebb in earnings estimates is spread across most sectors, yet the hardest hit are information technology firms, the outsized sector that drives most of the market’s upward momentum.

Again, we’re not trying to be doom-mongers. We don’t think the economy is about to crash and burn. We’re just looking at market movements objectively and raising a metaphorical eyebrow. The assumptions being made from one month to the next are whipping around like a flag in the wind. We think a more rational view would be a bit less ebullient than the euphoric turns and rather less catatonic despair when disappointments arise. Also, we’re pondering what it means when markets move more on macroeconomic assumptions than the underlying fundamentals of the businesses themselves


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Source: FE Analytics, data sterling total return to 28 June
More heat than light

President Donald Trump announced a trade ceasefire with China at the G20 meeting in Japan at the weekend.

The market had expected this and jumped late in the trading week. As per, details are light. The general thrust is that the US won’t add the threatened extra tariffs on Chinese goods and it will stop making life difficult for Chinese telco giant Huawei. In return, China will buy more American agricultural produce. Negotiations for a ‘final’ agreement will soon reopen too. To us, the idea of a definitive result for the trade tussle in the foreseeable future is laughable. The best that can be hoped for under a Trump presidency is an uneasy truce punctuated by occasional tweeted grumbles that omit specific incremental tariffs. Mr Trump is just too unpredictable, capricious and impulsive for it to be any other way. As China’s global clout continues to grow, it will cause friction with the US. That’s just geopolitical reality. A more nuanced, patient president could migrate the geopolitical sparring from trade to a less dangerous arena. But that isn’t in the foreseeable future.

Meanwhile, a truly substantial trade announcement came out of Europe last week. The European Union (EU) has sealed a free trade agreement with Mercosur, a South American trading bloc representing about a quarter of global GDP. This mammoth deal – the EU’s largest ever – culminated 20 years of painstaking negotiations with Mercosur members Argentina, Brazil, Paraguay and Uruguay (Venezuela was a member until it went off the deep end in 2016). Getting the agreement inked during a time of populism and general antipathy toward trade is some feat.

Coming up this week are the US ISM business surveys and nonfarm payrolls. In the UK, there’s a smattering of property and consumer data and a solid week of sun for most of the country. Enjoy!

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