Market commentary – October 2018

12th October 2018

The Author: David Cooper
Financial strategist, investment adviser and Sales Director for United Advisers

While Europe and Japan growth rates have slowed this year the US economy has experienced strong growth, so US Portfolio exposure applies portfolio construction and risk management parameters to criteria that reflect a positive US economic view.

With that in mind, this month’s market summary focusses on the US economy and reasons to be positive about it, so here are;

10 reasons to be positive about the US into 2019.

1. Business confidence

US businesses have been optimistic since Donald Trump’s election with tax reform, deregulation, and the President being viewed as a businessman rather than a politician, boosting confidence. This has led to the most recent survey results showing non-manufacturing activity; 80% of the US economy, at the highest reading since 2000, when the survey started.

2. Business investment

Survey data on business intentions and ‘hard data’ like industrial production and fixed capital investment show that strong business confidence feeds through to higher levels of business investment and capital expenditure.

3. Deregulation

Substantial regulatory increases under the previous administration were very unpopular with business and rolling some of it back is a factor driving increased business confidence and investment.

4. Inventory

The business activity upswing has reduced inventory across the economy. An inventory rebuild will boost the economy even more.

5. Employment

Weekly US unemployment claims are at levels not seen since the 1960’s, ex-workers are returning to work, and more workers are quitting jobs as confidence to move to secure improved terms and prospects rises.

6. Shale energy

Increased shale oil and gas activity is boosting the economy and moving the US toward energy independence and trade reduction.

7. Consumer confidence

The buoyant job market and one-off tax cuts have boosted consumer confidence to record highs with strong retail sales. There is little adverse effect evident from political events in Washington or concerns over trade policy.

8. Consumer debt

In contrast to before the Great Financial Crisis, US consumers are not increasing debt to fuel spending with multi-year lows for Credit Card default rates and family balance sheets in better shape than they have been in a while.

9. Inflation

While the price of oil has contributed to increased inflation, there is little sign of it getting out of control. Given the tight labour market, wage growth has been more subdued than expected.

10. Fed raising rates

The US Fed is raising interest rates because it can, rather than because it must. The economy is strong enough to adjust to higher rates, and it’s entirely possible that a year from now US rates will be at 3%. This gives the Fed room to make future rate cuts if needed, the Fed being currently the only Central Bank able to ‘normalise’ interest rates.

Meanwhile, in the rest of the world…

Chequers Plan rejected by EU – Brexit tensions escalate

While Mrs May performed strongly at the Conservative Party conference, her Brexit proposal was dismissed by the EU, increasing the likelihood of a no-deal Brexit.

Because all involved in Brexit negotiations seem committed to finding a solution, sterling had a better month in September but relinquished substantial gains following the rejection of Mrs May’s Brexit proposal.

Higher growth emphasis for Italian budget

The Euro fell as Italy, the third largest economy in the Eurozone, created tension with the EU Commission by agreeing a much higher budget deficit than previously forecast; up to 2.4% of GDP from 1.6% proposed by the Economy Minister and 0.8% predicted by the previous government

Trade wars intensify

The US hit China with an additional $200bn in tariffs, China hit back with $60bn in tariffs of its own and cancelled talks scheduled with Treasury Secretary Mnuchin.

Japanese economy accelerates

In the second quarter Japan’s GDP growth exceeded estimates by growing at the fastest pace for the past two years; 3.0% year on year. Japan’s strength, reflected in a rising Japanese equity market, currently displays across several areas including retail sales, household spending, and unemployment.

Dampened emerging markets

While Turkey and Brazil rallied strongly, emerging markets were generally dampened by falls in China, escalation of the Sino-US trade war, and India, the weakest market in September, falling 10% in Sterling terms.