Written by Hudson Adviser Phillip McGann
The local and international markets are up strongly this calendar year after a very poor last quarter of 2018. The overall market movements for December Quarter 2018 make sombre reading for investors but the start of 2019 is very promising.
The US markets tend to lead markets around the globe and the past 4 months have been no exception.
The Dec quarter capped the worst year in a decade for the US markets and the December result of itself was the worst monthly performance since 1931.
So why did the market collapse so spectacularly last year and why has it now staged such a dramatic recovery?
As always there are many reasons with a few as follows;
China / US trade wars: President Donald Trump has confronted China about intellectual property rights theft and dumping practices that have led to a huge trading surplus with the US. This was a signature election promise and he has not backed down.
Trump has slapped large and escalating tariffs on many Chinese goods and the Chinese have reciprocated in a “tit for tat” fashion that has (almost) gotten out of hand.
A truce of sorts has been called with negotiators lined up to sort out the mess in the next month which has left many economists predicting dire consequences for both economies - and by extension - the rest of the world. Financial markets have reacted to the threat and the potential compromises in equal measure and now we wait for a final outcome in coming weeks.
Negative: If no resolution achieved will weigh heavily on the markets.
Positive: Self preservation likely to find out as both sides will see “something” needs to be done or both sides lose out
US government shutdown: Again President Trump is at the epicentre of this issue and (again) it is an election promise that he is following through on.
He promised to confront illegal immigration into the US by building a Wall at the southern border with Mexico and he has now called on the Congress to fund it (or else)!
He has held up government funding for other depts. in the process and hence the shutdown of some of these depts. over the past month.
The issue has now been resolved – temporarily – but it will come up again in three weeks. Financial markets have (slightly) reacted to this issue over the past few weeks and will likely do so in the near term if the shutdown returns.
Negative: We may be back here again in three weeks.
Positive: Trump is a pragmatic individual and this has hurt his standing with his base so likely will resolve the issue with a use of executive powers to declare an emergency and fund the wall with Defence funds.
US economic activity and projections: Many economists are worried about the state of the US expansion which has been in full swing for the best part of 8 years. How long can the cycle continue is the big question and financial markets are fluctuating on the answer.
Positive: Current reporting seasons shows on balance the economy is powering along so expansion continues albeit it at a slower pace.
US interest rates: This issue is tied to the previous one and will impact the expansion directly if rates are raised too soon too fast. The inflation outlook for the US is fairly benign but with an economy the size of the US growing at a very quick historical pace and un-employment falling to historically low levels many pundits are asking where will it all end?
Will it be in a burst of inflation? Which the Fed is vigilant to ward off with higher interest rates whilst not trying to kill the “golden goose” by increasing interest rates too soon A delicate balancing act is in play and the financial markets are second guessing the way it will “tip” everyday.
Negative: If Fed continues to rise to keep ahead of inflation may “cause” a recession and market rout.
Positive: Fed is making the right soundings about being conscious of the role of interest rates in the expansion and has indicated that it will take on the markets concerns.
Brexit: What a debacle! A mess that is getting messier as the end of March approaches and the UK has to leave the EU with or without a deal. This is on some levels a very UK focused issue but is one that has echoes around the world as it shows how democracy if struggling to reconcile the wishes of the populace with their leaders.
Interesting times await and markets – again – react day by day.
Positive: Likely the end game will not be the unmitigated disaster many have speculated but perhaps a shock to the economy that can be worked through.
Domestic issues in Australia centre on the economy and how our record long 27 year expansion will play out over the next couple of years. Interest rates are stuck at a very low level and appear destined to stay there for a while or maybe even drop lower if the economy slows further.
At the same time the economy is in the midst of a credit squeeze as banks run scared of pending adverse findings from the Banking Royal Commission – out next week - and regulators baying for blood after being shown up as “asleep at the wheel” on their duties to regulate the banks.
The overall financial sector makes up 40 odd % of the local market and has proven very soft over the pat 12 months impacting portfolios.
Oh and also we have a looming federal election with the Labour opposition providing a huge target with promises of a huge tax increase on the back of a clamp down on investors through negative gearing changes on property investments, a reduction in the capital gains tax discount and a rescinding or franking credit refunds for certain tax payers.
Currently Labour is ahead in the polls but the government is closing and Australian Federal Elections are usually very close run affairs.
Positive: Australian has survived many changes of government over the past 27 years and the expansion has continued.
So there you have it A “wall of worry” everywhere you look but share markets continue to rise higher around the globe as investors sense “too much bad news” has been baked into already very low prices from late last year and are eager to dive in when only a few weeks ago they cowered on the sidelines.