WeekWatch – Wall Street places faith in the Fed

Monday 14th January 2019

Stock Take

Wall Street backs the Federal Reserve

Global stocks hit an upwards stride last week, with Wall Street leading from the front. Three issues stood out as likely drivers of this momentum: the direction of Federal Reserve policy, the US government shutdown and US-China trade talks. When it came to Fed policy, investors wary of rate rises were reassured by comments made this week by several senior officials that, essentially, the Fed was data-dependent, was not merely following a pre-set course on rate rises, and was even willing to factor market reactions into its thinking.

Another prevalent issue for Wall Street last week was the longest government shutdown in US history. Donald Trump’s failure to broker a deal to end the shutdown is partly down to his proposed Mexico border wall. The shutdown has a number of less obvious knock-on effects, including a reported lack of data on which traders might base buy and sell decisions. Sentiment was more positive over US-China trade talks and there was news on Friday that a senior Chinese official would visit Washington later this month. The S&P 500 ended the week up; the FTSE 100, TOPIX and EURO STOXX 50 all followed suit.

The UK automotive industry hits reverse

In the UK this week, GDP growth struck a six-month low and car manufacturing took a step backwards, with Jaguar Land Rover announcing job cuts of 4,500 jobs, and Ford expected to follow suit. Ominously, both companies warned of deeper cuts in the event of a no-deal Brexit. KPMG and British Retail Consortium figures showed the high street suffered its worst Christmas since the financial crisis, a trend confirmed by negative news last week on John Lewis, M&S and Debenhams. Morrisons and Tesco, however, bucked the trend.

Nick Purves of RWC Partners commented: “Whilst the UK food retail market continues to be extremely tough and is certainly not being helped by the uncertainties surrounding Brexit, both Tesco and Morrisons seem to have navigated the Christmas trading period with some success”. Chris Field of Majedie agreed: “Tesco has been the winner of the ‘Big Four’ supermarkets over the festive period and, importantly, customers’ perception of the supermarket’s offer went up by its biggest single increase in five years. This augurs well for the future.”

May’s Brexit woes continue

The UK government had other worries, of course, becoming the first UK government since 1978 to lose the parliamentary vote on its Finance Bill, only to suffer a second defeat the following day; one that will oblige it to publish an alternative Brexit plan within three days should it lose Tuesday’s vote on Theresa May’s deal. It is indeed expected to lose that vote, and reports suggested it was already planning to change the Brexit timetable in response. Bookies’ expectations of the UK leaving the EU on 29 March had fallen below 35% by the end of the week. Sterling and the FTSE 100 remained relatively controlled over trading period, although politics may be strongly felt on markets in the week ahead.

“Even if we could predict the outcome of Tuesday’s vote, we would never want to base an investment strategy on a single event,” said Tom Beal, Deputy CIO at St. James’s Place. “However, if the outcome does take markets by surprise, then what we have seen in recent months is that our fund managers, who take a long-term view, have been taking advantage of the opportunities presented by market movements to actively reposition their portfolios.”

Hyperinflation continues to spiral in Venezuela

“There is no subtler, no surer means of overturning the basis of society than to debauch the currency.” When pondering this stark warning by arguably the greatest economist of the 20th century, John Maynard Keynes, spare a thought for the people of Venezuela. A cup of coffee was typically priced at a quarter of a bolívar at the dawn of 2018, it has since skyrocketed to over 600 bolívars. Last week, President Nicolás Maduro won another six-year term, in an election dogged by boycotts and accusations of vote-rigging.

Venezuela is an extreme example in a relatively undeveloped country, but it does provide helpful context for some of the recent volatility on developed markets. Thus, volatility has spiked on developed markets even as growth has persisted and inflation has remained contained. The S&P 500, for example, recently suffered its worst December since 1931, despite fourth quarter US growth that is forecast to clock in at – a frankly healthy – 2.7% annualised.

Wealth Check

While not listed amongst advent calendars and the Boxing Day sales on the list of common Christmas traditions, it appears that tax returns have become a popular festive pastime for many; HMRC revealed that over 10,000 Self Assessment tax returns were filed over Christmas Day and Boxing Day. In total, almost 12 million taxpayers are expected to complete a 2017/18 Self Assessment tax return, but with less than three weeks to go until the 31 January deadline, less than half haven’t yet got around to it. Last year, 2.6 million procrastinators had still not filed their return by 29 January, leaving it until the final 24-hour window.

However, filing well ahead of the deadline will help you to avoid penalties and may even give you more time to identify reliefs and exemptions available to you. This includes pension tax relief and Gift Aid for higher rate taxpayers. Research suggests that up to a fifth of middle- and higher-earners do not claim the extra tax relief on pension contributions owed to them. “The idea of filling out a tax return can be daunting, but it’s important that pension savers appreciate the sums they’re potentially missing out on if they fail to claim the money they are owed,” says Ian Price, divisional director at St. James’s Place.

In The Picture

Last week marked the 35th birthday of the FTSE 100. A fall for sterling has often translated into a rise for the index and gains for UK investors, owing to the dominance of foreign earnings among FTSE 100 companies. However, in very recent months, volatility on global markets has taken the FTSE 100 down with it – even as sterling has remained weak. All the same, should sterling move dramatically this week due to Brexit developments, the old dynamic may yet return.

(Please note that past performance is not indicative of future performance.)

(Source: SJP)

The Last Word

“A very rich Lotterie generall, without any Blanckes, contayning a great number of good Prices, aswel of redy Money as of Plate and certaine sorts of Marchaundizes, having ben valued and priced by the commaundment of the Queenes most excellent Majestie, by men expert and skilfull … The number of Lots shall be Foure hundreth thousand, and no moe: and every Lot shall be the summe of Tenne shillings sterling onely, and no more.”

– Wording from an advertisement for the first national lottery in the British Isles in 1567, over 450 years ago. First prize was worth £5,000, but two fifths of it was paid out in crockery and linen.

The information contained is correct as at the date of the article.

Majedie and RWC Partners are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley.

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