Wednesday 1 February 2017

5 reaons the Markets will turn in February

1. After a US election, the historically most common trend is for a rise in anticipation and also as loose monetary policy is a given prior to any election. This has tended to cause a hangover the following year.

2. The US markets have touch all time highs recently - despite not particularly stellar corporate returns or signs of massive growth potential. The Price/Earnings ratios are well above the long-run average of 12.

3. Trump, is, err, mad. Whilst some of his policies are going to be good for growth in the US, like investing in infrastructure and trading off environmental protection for economic expansion, they are also going to be implemented badly - after all, few of his advisory picks are getting put in place quickly.

4. The over-blown reaction to his immigration executive order has made some large US corporates very jumpy - confidence is a key thing in the markets and this already has taken a knock. Yes, some of them are lefty-hand wringing types, but still, they run some very important companies for the US economy. Look at Brexit, all the big companies against and the FTSE regularly takes a kicking when they come out with the woe-is-me-shtick.

5. Protectionism - this is a two way street, good for US jobs potentially, but at the expense of international companies also probably inflation and slower GDP growth. These latter issues will be priced in before the former. Reducing trade won't be good for US markets.

All in all, the Trump bounce does not feel that sustainable in 2017, even if over 4 years things do work out for the best.

And finally, the old phrase is worth a mention., when the US sneezes the UK catches a cold...


Dick the Prick said...

Absolutely. I'm not too happy about this provocation of the One China policy either. Sure, it has philosophical merit but those guys have levers that are unavailable to democratically elected governments and could get shirty. If it came to a fist fight, they'd lose egregiously but tipping up that apple cart should be costed in somewhere along the line.

I don't think Trump's mad as such, more cavalier. A bit of a knob would probably be my view at the moment.

Blue Eyes said...

He surely knows that whacking tariffs on just raises consumer prices and distorts investment, leading to worse growth over time? Or if he doesn't his advisers should tell him.

Most of the industrial joblosses have nothing to do with globalisation and everything to do with automation. Closing the borders won't turn Detroit into a mass employment city again.

America's loss could be Britain's gain though if all the tech companies et al. find they can hire better and live easier over here. Let's try to make that work!

Steven_L said...

The US markets have touch all time highs recently - despite not particularly stellar corporate returns or signs of massive growth potential. The Price/Earnings ratios are well above the long-run average of 12.

Have they touched all time highs? Is the S&P500 adjusted for inflation? (No) Is the S&P adjusted for dividends? (Yes) Have there been inflation and dividend payments since 2000? Because we're only 50% above the 'all time high' of the dotcom bubble now (and we had a strong dollar - 1.40/£ - then too). Would 17 years of dividends and inflation more than make up for the 50% rise? I'd suggest it would!

As for the average p/e of 12 (gross yield of 8%), what was the average risk free rate on bank deposit or a government bond over this time frame? Let's use a nice round 5%, the average risk premium for equities then is 3% or 160% depending which way you look at it. Either way, equities have a long way to go.

But the way I look at it is this. In 2000 telecoms and tech stocks were in a bubble and wildly overvalued. In 2007 banks and resource stocks were in a bubble and wildly overvalued. Now banks and resources are at low valuations. Tech and telecoms yields 5% to 10% and some dotcom tech - social media - might be in a bubble but might not be or might still have a long way to go if it is. If there is a bubble then bonds are in a bubble, but that bubble is supported by the central banks and governments. The overspill is into 'bond proxies' - the consumer non-cyclicals. These might be in a bubble, but they have a long way to go before they reach the yields of inflation linked bonds.

Forget the S&P500 for a moment. The FTSE is top heavy resources and banks. If bonds and bond proxies stay high, but banks and resources recover, it's next stop FTSE 10,000.

Anonymous said...

"Mad, is he? Then I wish he would bite some of our other politicians."

Thud said...

To early to tell until he addresses corporation tax rates and sets? repatriation of profits tax.

CityUnslicker said...

top comment SL. not sure about your line of thought on P/E ratios though.

The rest could well be right - we will soon enough see.

Steven_L said...

I'm not sure why I wrote 160%, I meant 60% as in £8 of interest is 60% more than £5 of interest.

The line of thinking is this. If cash yields 1%, safe bonds 1% to 3%, property 3% to 6%, then why shouldn't hassle free, liquid equities yield less than 8% on average?

But I'm mainly holding brexit battered things yielding 10% because of fears about their cyclical nature (loans, cars and houses), dotcom type businesses that trade a long way under a target 4x turnover (GoCompare, Hostelworld) plus a few other bits and bobs.

I'm not selling them this February either.

Anonymous said...

the old phrase is worth a mention., when the US sneezes the UK catches a cold...

There might actually be some unforeseen [further] advantages to Brexit.

If there is going to be a trade war between China, the EU and the US, then having all the economic levers at your command will be a great advantage.

Also see May is planning a Keynesian house building boom, straight from the "Prime Minister for Dummies" playbook.

andrew said...

Also if the US really does get a bit Turkish politically, the UK will be the only place that is western, speaks English and has the rule of law.
That can't be bad for the city.