2018 has been a fascinating year so far with multiple factors pulling and pushing markets higher and lower.
In the year-end review we highlighted the historic lack of volatility in 2017 and questioned whether this could continue through 2018; it quickly became clear it wouldn’t.
Volatility can often be a thoughtful investor’s friend, in that bouts of suicide-selling create compelling windows of opportunity to bag high quality assets at momentarily undervalued prices.
The really good stuff seldom goes on sale but when it does, load up the truck.
So more volatile markets are not to be feared if the overall longer-term trajectory is up and so far this year, we’ve seen some modest returns in the balanced and adventurous portfolios.
Market Factors
- As we suggested would likely be the case, the big US corporate tax cuts and lower cash repatriation rates absolutely turbo charged profits in 18; they were mostly stellar. What was interesting however was that markets, (particularly the US), went nowhere on the back of 20% plus profit upgrades which in and of itself is a type of correction. The market trades at an average price to earnings ratio (the multiple of profits a share price commands) over the long term of around 17 times, early in 2018 it got to 19 times; after the earnings season it was back to below 17, as profits went up and share prices stayed flat.
- The trade tariffs issue continues to gain massive headlines with ‘THE’ Donald employing his ‘Art of the Deal’ tactics to renegotiate everything with pretty much everyone. Now you can mock the Big D and you can as Nicola does, absolutely detest him, but actually he’s got a point. The US has over decades done sweetheart deals on trade to shore up political alliances and gain political and military favour. For many reasons, chiefly one suspects because they are now energy self-sufficient, have therefore zero appetite to engage in the Middle East and don’t realistically see any military threat from China or Russia ongoing, they now want to level the economic playing field. Plainly China has been getting away with intellectual property theft on an epic scale and has barred access to its markets. Europe has finagled on defence spending and imposes tariffs to protect its industries and keep out the US with its damnable free market, low social security costs and resultant competing advantage, very un-French! Canada and Mexico have done really well out of NAFTA and the US is now calling time on the free lunch (of refried beans and maple syrup) they’ve been enjoying.
- The grumbly rumble of social discontent which continues to bubble to the surface in popular elections with hard right and hard left parties gaining significant support, is why we should be properly worried about the ongoing social construct. Donald is all about America First, well really low and middle-class America First. Whilst the economic elites have done wonderfully over the last 10 years the majority of families have had a tough time with low wage growth and employment instability. The majority of folks are not feeling the economic love and they’re increasingly fed up with seeing Hedge Fund Managers swanning around in Bugatti Veyrons.
Conclusions
If we separate the noise from the facts.
The facts are that growth is excellent, interest rates won’t be rising rapidly, inflation is muted, and asset prices are not bubbly (excepting crypto currencies).
The noise which has been loud at times this year is related to disputes, trade wars and the potential for disaster.
One suspects that everyone is pragmatic enough to know that full blown exclusionist trade barriers don’t work for anyone and therefore deals will be done; all sides will claim famous victories and the power of the underlying economies and profit growth will result in more volatile but justifiably higher asset prices.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.