Brian’s escaped to soak up some Spanish sun this week leaving me to step in on an exciting week. The highlight? Our sister company Dennehy Wealth has just been shortlisted for Adviser Firm of the Year in the UK!
Markets however have been less celebratory as we saw cracks appearing both across the Atlantic and closer to home.
Trump’s tariff gambit began as he proposed a 25% levy on all imports from Canada and Mexico, tied to fentanyl concerns and immigration. He also announced a further 10% tariff on goods from China.
China wasted no time firing back calling it “irresponsible” and warning that “no one will win a trade war”.
While the rhetoric isn’t surprising, the timing is intriguing.
Trump's tariff announcements, two months before he steps back into office, suggests that there might be room for negotiations rather than a hard line. After all, what’s a dealmaker without a bit of brinkmanship?
Ultimately the US market – already the most expensive in its history – relies heavily on consumer resilience. Tariffs increase costs, push up inflation and ultimately strain the wallets of US consumers. History warns us: Bush’s 2002 steel tariffs cost 200,000 jobs, the 1930 Smoot-Hawley Act chocked global trade and worsened the Great Depression. Today, markets have largely shrugged off the news, but complacency is risky.
When valuations are at today’s levels and this sort of uncertainty increases, history has taught us one thing: fragility lurks.
Evidence of this fragility isn’t hard to find. In this note two weeks ago Brian referred to the growing number of cracks appearing in the edifice of the US stock market, poised like the avalanche-prone slope, merely awaiting the final snowflake.
A particularly compelling crack was highlighted this week by Jesse Felder in the Felder Report showing that US corporate insiders sold shares at a pace not seen in 20 years. Insiders, i.e. those closest to their businesses, know when the narrative and numbers don’t align. When they sell, it is one of the best predictors of future earnings trends. It’s like a builder abandoning site mid-project. If the person laying the foundations suddenly walks away, it’s a sign they don’t trust the structure to hold.
Such sentiments are very powerful, yet this week in the FT Katie Martin, not one for hyperbole, tells us of the return of TINA… There Is No Alternative:
“TINA refers to the growing perception among fund managers that there is no alternative to the US, in any asset class. Big investors are having a hard time articulating a case to put outsized funds to work anywhere else… despite deep unease.”
Fifteen years into a US bull market which began in the depths of 2009, now enjoined by an investor mania and one of history’s greatest equity market bubbles, can this really be true? There are no other good ideas for client money?
“In public, fund managers say all the right, polite, diplomatic things. In private though, the commentary is much more nervy. But what does everyone intend to do about all this? Load up on even more US assets, of course.”
According to Katie it is believed that the case for US stocks is overwhelming versus Europe or Asia.
These fund managers appear to have no sense of Benjamin Grahams pendulum (see quotation) even though his writings were probably one of the first serious books they were compelled to read about investing.
It is even worse with retail investors. According to a recent Wall Street Journal article, the average individual’s portfolio has 40% of its value tied up in just three tech stocks. Wow.
On each occasion in the past when that became the overwhelming sentiment, it signaled that the next big investment opportunities lay elsewhere.
The US has gone from “uninvestible” in 2008/9, to today’s only investment choice. Yet the US is the most expensive it has ever been compared to the rest of the world.
Tread carefully.
Across the Channel, this week our neighbours in France find themselves in a precarious position. Later today the ratings agency S&P will decide whether to cut the French government debt rating even further, having already cut it in May.
France’s fiscal challenges are nearing breaking point. Their borrowing costs, measured by its 10-year bond yield, have just exceeded those of Greece for the first time. They are grappling with a 6.1% budget deficit, rising debt, and a gridlocked parliament unable to pass a credible budget (though I suppose we shouldn’t be too quick to throw stones from glass houses!). Michel Barnier, not one for alarmism, warns of “serious turbulence” if they fail to get his budget through.
The bond market agrees as investors are signalling that they no longer think of France as a core anchor of the eurozone. The Telegraph was blunt: “The French are playing with fire.”
The fiscal irresponsibility harks back to the downfall of the Ancien Régime, when mounting debts helped trigger the French Revolution.
Could France become the proverbial canary in the coalmine and spill over into the wider eurozone? What’s left of investor confidence could unravel quickly.
As if on cue, the music continues in the US in this month’s What’s Hot? What’s Not, with 9 out of the top 10 Hot Funds as well as the top 2 sectors. In contrast, again unsurprisingly sees Europe ex UK at the bottom of the Sectors Table, with half of the bottom 10 funds, alongside gold miners as the gold price took a breather.
Short term it’s been a positive week for most major indices with the Dow Jones leading the way, up about 3% on a short week with it being Thanksgiving in the US. The UK was up a bit, and China’s domestic market lagged, down around 3%.
Have a good weekend all and you may well hear from me again next week!
Joe