Investment Line is a regular investment bulletin produced by Mattioli Woods plc. The communication provides an update on funds, highlights some of the areas we are focusing on, and shares our thoughts on the issues of the day.
The oft-repeated and rather tired adage that bull markets “climb a wall of worry” has been endlessly repeated since the financial crisis. Those who take investing other people’s money seriously should constantly be worrying about what might go wrong – especially when we have seen so much artificial support for equity markets since the financial crisis. The latest Bank of America Merrill Lynch survey of investors has shown a definite increase in those feeling more negative about investment markets. Investors have indicated they are reducing equity allocations as the well-known list of worries is joined by concerns over a trade war. The exchanges between the US and China are indeed very serious and if they escalate, the trade war could have a material impact on economic growth (though estimates vary). A trade war was named by 60% of respondents as the greatest “tail risk” to markets, which is the highest level reached by any such risk in the survey since the EU sovereign debt crisis. So, it’s a big one. For us, it is the timing of the “hostilities” that is concerning. It comes at a time when market sentiment is weaker than it has been already on the turn and when valuations are high across the board. Though a recession is far from imminent, we are getting closer to a time when it must be considered – and if this trade war rhetoric (and implemented measures) are elevated at that time, things could get really tricky. Perhaps complacency is starting to evaporate as investors realise they are going to have to meaningfully engage with the idea of risk. The good news is that those who are more discriminating should be able to differentiate themselves from the madding crowd.
The Federal Reserve is showing few signs of relenting on its intended pace of rate rises, with the latest testimony from Fed Chair Jerome Powell providing an upbeat assessment of the US economy. The strategy remains to continue on a gradual path of increases unless the data materially changes. Some are nonetheless critical of the approach being adopted – although consumer confidence and manufacturing data is strong, there doesn’t appear to be the sort of inflationary pressure that would normally lead to tightening. While wages have picked up modestly, they are not exceeding consumer price inflation, and employment costs appear to be held down by underemployment trends and other structural factors. There are some, though, who still feel rates need to move higher so they can be meaningfully cut and have a psychological effect in the event of a crisis, or just when the next recession occurs. Either way, the increases so far are already materially changing investors’ perspectives, with areas of the US government bond market and even cash becoming viable alternatives to equities (the 3-month Treasury bill now offers over 2%). This is a material shift and the effects are likely to ripple through financial markets in the months ahead.
Investment Line is written and edited by members of the Mattioli Woods Asset Allocation Team, and is for information purposes. It is not intended to be an invitation to buy, or act upon the comments made, and all/any investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. The value of investments and the income from them can fall as well as rise, and investors may not get back the full amount invested. Past performance is not a guide to the future.
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