View more on these topics

Anthony Willis: Volatility ahead for US after midterms

Political noise from Washington is likely to increase in volume

A recent visit to the US to meet fund managers, strategists and analysts left us reassured that, for now, the US economy is in decent shape. But we were not convinced market momentum would be sustained.

The S&P reached a record high during our visit, but recent weeks have proved to be considerably more volatile, despite an earnings season that was generally positive.

We have seen corporate earnings season come to the rescue when markets have struggled in the past but this time, despite the majority of companies beating expectations, the mood appears to have been “glass half-empty”.

Why style differentiation matters in US equity investing

With earnings having been so robust, the narrative now appears to be that we are past peak earnings growth for this cycle, with firms facing headwinds from rising wages, higher input costs and pressures from tariffs, on top of a backdrop of higher interest rates.

The economic data in the US remains strong, albeit boosted by a significant increase in government debt to fund tax cuts, with more to come as the nation seeks to increase infrastructure spending in 2019.

There was a consensus that the boost from the tax cuts and positive second-round effects will more than offset the impact of the trade war and lengthen this economic cycle further. We also noted that quantitative easing and low rates have had a long-term impact on US corporates, with 36 per cent of companies in the Russell 2000 failing to make any profit last year.

But firms fail to go out of business, meaning the economic “winners” cannot succeed because the “losers” continue to operate.

Was October volatility a trick or treat?

The most memorable quote came from a fund manager talking about higher interest rates: “When the Federal Reserve hits the brakes, someone always goes through the windshield.” The Fed has only just taken its foot off the gas – and interest rates are only just positive in real terms – so there could be more interesting and volatile times ahead.

PMI manufacturing data shows that the US economy has for the moment “decoupled” from other major economies, with the momentum from the second half of 2017 sustained. PMI data elsewhere has eased significantly, as seen in the chart below.

The midterm elections saw the Democrats take control of the House of Representatives for the first time since 2010. A situation of “gridlock” in Congress is a regular occurrence in US politics. It is normally a decent backdrop for markets, but as policy change becomes less likely, this time it does mean that the tax cuts which have stimulated the economy this year may not be followed up with further significant policy measures.

President Trump called for collaboration with the Democrats in the aftermath of the election, seeing scope for common ground on issues such as infrastructure, trade and drug pricing. However, given the current polarisation of US politics, it remains unclear how much the Democrats will be willing to work with the president.

They are likely to use their majority to initiate investigations into Trump’s tax affairs and Russian “meddling” in the 2016 election.

EU faces significant political choices

The political noise from Washington is likely to increase in volume; this will continue to prove a distraction but could impact sentiment from time to time, not least if the president seeks to ramp up the trade war with China.

With the midterm elections behind us, history suggests this should be a more positive period for US equities. US indices are already in reasonable shape.

Nevertheless, we do expect further bouts of volatility ahead. This is appropriate at this stage of the cycle, as financial conditions begin to tighten and the Fed continues to shift from the monetary largesse of the past nine years to a monetary policy more in line with rising inflation and tight labour markets.

Anthony Willis is an investment manager in the multi-manager team at BMO Global Asset Management

Recommended

Schroders Lloyds advice venture restricted to Fusion Wealth platform

The joint advice venture between asset manager Schroders and Lloyds Banking Group will exclusively use the Fusion Wealth platform, the firm has revealed. Lloyds and Schroders recently announced they were joining forces to form a new financial planning business, including taking on around £13bn of Lloyds clients’ assets that were previously held in a  mandate with […]

FCA proposes price cap on rent-to-own firms

A price cap on firms in the rent-to-own sector will be introduced from April next year, the FCA has proposed. The regulator says the cap, which is subject to consultation, will provide protection for some of the most financially vulnerable people in the UK. Planned to come into force as of 1 April 2019, the […]

FSCS still processing 2,000 Beaufort Securities cases

Two thousand clients of discretionary fund manager Beaufort Securities are yet to be refunded close to a year on from its closure to new business. Confirming it is still working on around 2,000 cases, the Financial Services Compensation Scheme says 3,000 of a total 17,500 retail clients affected will be given a “large part” of their […]

Tax year-end planning for annual allowance

Last tax year-end there was a lot to think about in relation to planning. The introduction of the tapered annual allowance and the implications of moving to a fixed pension input period, the reduction in the lifetime allowance and potentially applying for protection, and the concern about changes to tax relief, to name a few. […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com