Investors are galloping from one extreme to the other in all sorts of markets. But nothing is black and white, warns chief investment officer Julian Chillingworth, so investors should try to focus on the longer term effects and ignore short-term craziness.
Source: FE Analytics, data sterling total return to 30 September
Mr Market on a knife edge As it stands, the global investor mood isn’t quite despair, but it’s close to resignation. If Mr Market could talk, he would probably be muttering something about having “had a good run,” a recession being “overdue,” and maybe “late cycle stuff.” Could be true! No-one has yet been able to come up with a sure-fire way to call a recession. Yet for all the worrying features of the present, there are some promising ones too. Global PMIs – a mixture of upcoming orders, hiring intentions and general mood-taker of economies – have been pretty poor around the world for the past few months. As these numbers glide below 50, the level which separates growth and decline in business activity, concerns about a worldwide downturn rise. Chinese GDP growth is slowing. The UK is expected to dodge recession, but only just. Germany is looking like it will be less lucky. Even the US, that shining light of economic activity, has been fading lately. This led the US Federal Reserve (Fed) to cut its benchmark interest rate twice in two months. It is widely expected to shave another 25 basis points off rates at the end of October too. If it does, the central bank will have, in just three months, reversed a third of all the interest rate increases that it took three and a half years to implement. Not only that, but our research suggests that the Fed hadn’t actually raised rates too far in the first place. In fact, the central bank has rarely cut rates in conditions similar today’s. These cuts seem aimed more at keeping investors and businesses from panicking and upending the real economy than about the underlying performance of day-to-day America. Looking around the economy, it’s hard to tell whether we are sinking into recession or if this is just a temporary fluctuation in economic activity that will pick up again, avoiding a recession and prolonged slump in stock markets. We feel it’s just too early to say. US employment is strong, household spending is skipping along and the American housing market has been doing well. These are atypical signs of impending doom for the US economy, which is the predominant driver of worldwide economic growth. Investors appear to be reserving judgement until after the coming quarterly earnings announcements, but fearing the worst. The American Association of Individual Investors takes a weekly temperature of the market: at time of writing, 44% of investors were pessimistic and 36% were neutral. This quarter’s earnings could end up being a referendum on global commerce in 2020. Bond yields