To a certain extent stock markets are global, and follow closely what goes on in the USA. So when I talk about the US economy, it’s more to give a lead indicator of what is going on, and how this may effect us and the rest of the world.
Whilst in the UK the papers are mainly concerned about Brexit, globally other concerns have reared their head, where the US economy, a key driver of global growth, is having problems.
The June meeting of the Federal Open Market Committee held on Wednesday, told us that the United States economy is in danger of slowing, or recession within 12 months.
Not only have the Federal Reserve done a complete ‘U Turn’ on raising interest rates, but they are now so concerned, they are considering reducing interest rates to re stimulate the economy.
What has caused this?
The positive effects of the Trump tax cuts have been offset by tariffs and the trade war with China, where the deepening war of words has effected sentiment.
Growth indicators show a slowing of the economy. The Federal Reserve Bank of New York’s, Empire State Manufacturing Index showed the biggest monthly decline since the last US recession. Transportation also gives a lead indicator and the FTR Trucking Conditions Index looks no better and shows contraction. Industrial metals provide another indicator and the Bloomberg Industrial Metals Subindex shows the initial Trump optimism has faded.
The above said, perhaps the most important development is the highly regarded technical indicator, known as ‘the inverted yield curve’, flashing red for the first time since 2007. Yes this indicator gave warning of 2008/09.
Over the last sixty years every time this indicator has flashed, the US has gone into recession in the next 12 months, apart from one time in the late 1960’s. It’s therefore regarded as pretty accurate and this is why the Fed is in reverse to try to re stimulate the economy.
So the Fed has indicated they would be open to reducing interest rates and may even have to consider QE again to re stimulate the economy.
What does this mean ? Markets are a little complacent right now, and were appeased by the prospect of the continuation of cheap money, whilst the value of cautious assets has increased, due to a ‘flight to safety’.
As we specialise in cautious investing this has increased the value of those assets within portfolios, and where the equity positions also continue to do well.
So far so good, however I am wary that bond markets are performing as if they are bracing for a recession which may not happen, and so some profit taking in this area may be due in the next few months.
We will know more in July, as its likely the Federal Reserve will cut rates or give a strong indication they will do so over the summer. This is especially the case if the trade rhetoric between the US and China worsens, or where a geo political event between Iran and the USA causes greater uncertainty.
In summary, our cautious approach continues to add value in helping to protect the downside, and where a ‘flight to safety’ has helped increase the value of the cautious holdings. We continue to remain vigilant and adaptable to the changing environment, and closer to home ongoing Brexit developments.
Sources: Bloomberg , Financial Times, Wall Street Journal
Austyn Smith is a leading advocate of the ‘risk managed’ approach and ‘all weather’ investing, and has been featured as a Citywire ‘Cover Star’ in 2010, 2013 and 2017.
Following his work on risk reduction strategies, in 2011 he was recognized by Citywire Wealth Manager magazine as ‘Being in a position of some influence among your peer group, and likely to take a leading role in setting the investment agenda for UK Private Client managers.’
Austyn has recently contributed to leading publications by Citywire, and the Institute of Directors, and over the years has been quoted in the Sunday Times, Mail on Sunday, The Independent, and Bloomberg Markets.
With over 25 years wealth management experience, Austyn lives with his wife and children, Black Labrador and Springer, in Beaconsfield, Bucks.