Market Update - December 2016
  • Financial markets were relatively resilient in October despite some high-profile negative turns in the ongoing sagas of major developed economies.
  • The U.S. dollar strengthened relative to other major currencies, weighing on dollar-denominated performance.
  • Global fixed-income fared poorly in U.S. dollar terms, led again by U.S. high-yield bonds. Global equity markets also slid, although pockets of strength were visible in Latin America and peripheral Europe.
Financial markets were relatively resilient in October despite some high-profile negative turns in the ongoing sagas of major developed economies. The tone of the U.S. presidential election deteriorated alongside a series of “October surprises” that painted both candidates in a terrible light. U.S. equities declined and volatility increased to finish October at its highs for the month. The U.S. Treasury yield curve steepened (yields move inversely to prices) as rates rose across all maturities, with long-term rates increasing in greater magnitude than short-term rates. Crude-oil prices crested mid-month at their highest levels since summer 2015, before sliding to end October more than 9% below their highs.
Global equity markets declined in October, as reflected by the MSCI AC World Index (Net), with negative performance across every global sector besides financials. Materials experienced the most modest slide, while information technology, utilities and energy also had comparatively small losses. Healthcare had the sharpest decline, followed at a distance by telecommunications and consumer staples. Latin America and peripheral Europe had a strong month, with Brazil leading at the country level, followed by Egypt, Chile, Hungary and Mexico. The Czech Republic, Austria and Greece also performed well, as did Poland and Spain. The deepest losses came from Belgium, Israel and Finland, followed by Denmark, New Zealand and Switzerland.
In November, Republican presidential nominee Donald Trump stunned his critics with his election victory.Like the ambiguity, confusion and controversy caused by Brexit, the presidential election in the Philippines and far-right and far-left parties in several European countries, Trump's ascension to power is a leap into the unknown. There's never certainty about what the future holds, but with Trump's vague policy proposals and newness to public office, this is particularly true when it comes to his presidency. Something market prognosticators are sure of, however, is that financial markets do not like the unknown — and often react with volatility.
We were already seeing signs of inflation prior to the election, and a 3% annual rise in the Consumer Price Index now seems within reach in 2017 as higher energy prices work themselves into the year-over-year figures. This would likely keep the Fed on its toes and could result in a more consistent rate-hike cycle; but too much tightening too fast could cause a shock. Still, higher rates indicate improved sentiment and should not hinder growth.
The views expressed herein are the current views of Alan Boswell & Company Limited.
They do not represent a personal recommendation. Please contact your financial adviser with regard to your personal circumstances.
Market Update - December 2016
Markets
Following Brexit there was uncertainty in the UK commercial property market, but this has since shown signs that it is stabilising.
Stock-market turmoil is typical following U.S. presidential elections, even when the outcome of the election is not terribly surprising. When looking at the S&P 500 Index's one-month and one-year returns following each of the last 12 presidential elections, the only thing that can be concluded with any confidence is that markets tend to be more volatile both immediately after a presidential election and over the next year. We expect the lead up to, and the first 365 days of Trump's presidency to be no different. What cannot be said with any conviction is the direction or ultimate magnitude of the change.
As for market movements tied more uniquely to the new president, Brexit may provide a template, as markets defied expectations by falling briefly before closing higher that day, while the longer-term implications are expected to continue to play out for years to come. Binary events (such as Brexit and elections) highlight the challenges of making accurate short-term market projections.
Fears that Trump’s victory would abruptly kill what is the second-longest bull market in U.S. history did not materialize in the immediate aftermath of the election. Corporate earnings, especially in energy, should begin to look better on a year-over-year basis when the first quarter of 2016 rolls off. Treasury bond yields did, however, spike higher following the election, and they could continue to rise. Historically, yields in the range of 4% to 5% have had a negative impact on growth. That number could be lower in our current environment, but in mid-November, yields for 10- and 30-year Treasury bonds were roughly 2.25% and 3%, respectively — a long way from being problematic. Emerging markets and commodities will face a headwind if the U.S. dollar continues to strengthen.
The first 200 days of the new administration should give the markets a good look at the direction of future policy.
The views expressed herein are the current views of Alan Boswell & Company Limited.
They do not represent a personal recommendation. Please contact your financial adviser with regard to your personal circumstances.
Market Update - December 2016
Summary
The U.S. presidential election will have an impact on the economy and financial markets in the months and years ahead. With regard to the U.K., many observers have been surprised by the resiliency of its economy, although it is way too soon to sound the all-clear. The BOE has pre-emptively cut its base rate to the lowest level in the multi-century history of the central bank, and restarted its quantitative-easing program and previously successful funding-for-lending scheme. On the fiscal policy side, the new Chancellor of the Exchequer scrapped his predecessor’s austerity plans and in all, U.K. economic policy has shifted dramatically toward easing well before the negative effects of Brexit can be felt. However, while no one knows what a final Brexit agreement will look like, we suspect it will be nowhere near the position being pushed forward by various U.K. leaders. Given this uncertainty, we think investment is likely to slow in the months ahead.
Please note the following:
All investments involve different degrees of risk. Please remember that past performance is not a guide to future performance. The value of units and shares and the income from them can go down as well as up and investors might not get back the amount originally invested. Exchange rates may cause the value of overseas investments to rise or fall.
Where we have expressed views and opinions, these may change over time. None of the information mentioned in this document represents a specific portfolio or holding nor constitutes a recommendation to buy or sell.
The views expressed herein are the current views of Alan Boswell & Company Limited.
They do not represent a personal recommendation. Please contact your financial adviser with regard to your personal circumstances.