Monthly Market Outlook August 2017/September 2017Monthly Market Outlook Article
The past month saw two catastrophic hurricanes hit the US and escalating tensions surrounding North Korean nuclear tests. Surprisingly, US equity markets have still managed to make new highs over the period, buoyed by economic conditions which still appear fairly robust.
Firstly, our thoughts go out to all those affected by the recent hurricanes, which were the first to hit the mainland US in 12 years. Once all the damage has been tallied, it is likely to be one of the most costly natural disasters in US history. The storms have also caused significant disruption to businesses, denting refining capacity and sparking a tick up in oil prices. One would expect the Q3 US GDP growth rate, among other economic data releases, to be distorted by the impact of the disasters. One positive has been that Trump, at the expense of his own party loyalty, has agreed with the Democrats to an extension of the debt ceiling tied to hurricane relief spending. This delays the intricacies of the debt ceiling discussion until December and avoids a government shutdown during a time of genuine national crisis.
At the end of August we had the annual Jackson Hole symposium, which passed as a non-event. The Federal Reserve's ("Fed") plans for any tightening are likely to be delayed by Hurricanes Harvey and Irma. The European Central Bank ("ECB") has promised to outline its tapering programme in Autumn. With no announcement at the September meeting as a result of the continued strengthening of the euro, the market will be awaiting this at their meeting next month.
In the UK, inflation rose from 2.6% to 2.9% which was marginally above market expectations. With wage growth still muted and Brexit uncertainty ahead, the Bank of England ("BoE") decided to keep rates unchanged at their September meeting.
However, they did note that that they see scope for a reduction in stimulus over the coming months. The economy has little slack left, as evidenced by the strong unemployment report showing the lowest unemployment rate in 42 years.
Geopolitical tensions between North Korea, China and the US remain high.
Korean missile tests have become increasingly concerning with some flying directly over mainland Japan. What makes this situation particularly serious is the nuclear threat and a fractured relationship between Washington and Beijing, however a military solution is in nobody's interest. The Chinese, as North Korea's main source of trade and oil supplies, are the most effectively positioned to deal with the threat from Pyongyang. More recently the rogue state tested an H-bomb which appears to have raised concerns in China. We will continue to monitor events in the region closely.
What has been surprising is the minimal impact these risk events have had on global equity markets. The S&P 500 and FTSE 100 indices have been broadly flat over the last month, supported by robust economic survey data. Even the South Korean Kospi index, which one would expect to have taken a significant hit amidst the threat of war, is also relatively unchanged over this period.
Our advice to long-term investors, as it often tends to be, is to look through this short run political and economic uncertainty. Equity markets continue to press on amidst a relatively benign economic backdrop.