We have reached Friday once more with the sun on our backs, which is always a positive! The birds are singing, trees are beginning to look greener and the first shoots of spring are showing. What could possibly be better, aside from this week’s News, Views and Truths? Hopefully, more positivity!
As your finest purveyor of positivity, it is my sworn objective to deliver this in buckets. So here goes…
Looking back into 2018, which is something I have been doing a lot of lately, the issue on investment market lips was the path that the US Federal reserve seemed to be on. This incessant normalisation of interest rates was their only plan and as readers of this blog will know, this ended in a head-on collision with the market.
And the market won. Double-digit losses resulted in a negative 2018 for investors globally and after such a positive 2016 and 2017, it seemed that the party was over.
However, as a wise man once said (Rick Santelli, CNBC Business News editor, to be precise), “As long as the Fed keeps playing music, you gotta keep dancing.”
This week the Federal Reserve morphed into the Goombay Dance Band as they formally announced what many, including myself, have been predicting – that 2019 would be the first year since 2014 in which it would not raise interest rates. Not only that, but it also said that from September it would stop automatically reducing the banks balance sheet, a reversal of its Quantitative Tightening (QT) programme.
However, of most surprise was the tone of the announcement. Genuinely, many investment analysts in the States gain more insight into the future by analysing the words used in such announcements rather than the facts delivered themselves. Algorithms are created to analyse such speeches and investment decisions are made based on the words used illustrating one particular course of action or perhaps inferring another. Investment analysis is wild crazy, folks!
This week’s speech was seen to be a much more dovish tone; a dove is an economic policy advisor who promotes monetary policies that involve low interest rates, based on the belief that low interest rates increase employment. The opposite is being hawkish, guarding against inflation getting too high. Think about a hawk circling to protect the upper limit of inflation; to curb inflation, a hawkish policy will increase interest rates or some other equivalent action.
Keeping interest rates lower results in a much more supportive economic stance, in particular to the markets. It is the literal reversal of their 2018 stance which resulted in the market sell-off, indicating that they are no longer concerned about an overheating US economy. With inflation risks off the table in the near term, the Fed will begin to turn its attention to using operations to support financial markets. Which is hugely positive for equity investors.
And I promised to keep you abreast of European Central Bank developments, although I did not think it would happen so fast…
As I wrote in last week’s blog, my firm belief is that the ECB will commence full blown QE this year. Today, they took another step closer. A rule designed by former Governing Council member, Athanasios Orphanides, praised by researchers at the ECB just after the end of quantitative easing was announced, says policy is now too tight. One more indication that the Eurozone requires greater fiscal stimulus.
And if you thought that the QE train was about to stop rolling, the German 10-year bond yield fell below zero for the first time since 2016. The reasons? Mounting evidence of a slowdown in the euro area and a more dovish outlook among global central bankers. Everything is leading to money printing.
So, how are markets? As I write, the FTSE 100 is up 1% for the week, making that a fantastic 10.57% year to date. The US S&P 500 is up 1.5% for the week and 11.48% for the year, with Japan’s Nikkei 225 index up 1.2% for the week and 4.11% for the year. The biggest faller last year in Emerging Markets has had another positive start with 9.94% for the year and the EURO STOXX 50 is positive with 8.99%.
Remember, this is since January. That’s 12 weeks. And with so much support from the powers-that-be, the desire for it to continue is huge. Could I get more positive? Yes; here is a video of Daley Thompson, Britain’s greatest athlete, and my own personal hero, winning his second Olympic Decathlon Gold in the 1984 Los Angeles Olympics.