Way back when, I studied literature at university and learned about something called the pathetic fallacy. It’s when you attach human feelings to inanimate objects, as in ‘I wandered lonely as a cloud.’ Pathetic as in feelings, not weak and feeble.
I am reminded of my English studies as I put finger to keyboard for this column because outside my window the sun is smiling on a happy midsummer garden. That seems appropriate at the end of a remarkable six months in the financial markets when pretty much whatever you’ve invested in has gone up, significantly so in many cases.
What a contrast to the same view six months ago at the end of a calamitous fourth quarter for investors. I don’t have a willow, but if I did you can bet it would have been weeping in December.
Friday brought the second quarter of 2019 to a close as far as the financial markets are concerned. It’s true that April to June didn’t live up to the V-shaped recovery of the first three months of the year. That was thanks to a wobbly May as Donald Trump ramped up his trade rhetoric. But it has nonetheless been a good enough quarter to enable us to sign off on a very healthy half-year market report.
Investors who looked through the New Year gloom and bought a diversified collection of global shares have seen them rise by 15% in the last six months. If you had just focused on the world’s biggest stock market, you would have fared even better. The S&P 500 index on Wall Street rose 17% between January and June. Even our own friendless FTSE 100 index, keeping the score through the ongoing Brexit fiasco, managed to add 10% over the same period.
And it has not just been shares which have soared. Bonds, which typically find a reason why the glass should be viewed as half empty, have also risen across the board. The 10-year bonds issued by the governments of everywhere from Canada to India, Switzerland to Mexico have delivered positive returns. In a weird inversion of Europe’s sovereign debt crisis, the liabilities of Greece and Portugal have been the best performers of all for fixed-income investors.
You don’t have to look far to understand why both shares and bonds have risen this year. There’s a well-worn but useful investment adage that says: ‘don’t fight the Fed’. Being guided by the US central bank has certainly made good sense so far in 2019.
Back in December, markets were in a funk because clear evidence of a slowing global economy seemed at odds with a Federal Reserve that was still committed to ‘normalising’ US monetary policy. It remained determined to continue the interest rate rises it had started in 2015. In October, Fed chairman Jay Powell had remarked with blithe insouciance that ‘there is no reason to think that the cycle cannot last for a while, practically forever.’ That looked absurd by the end of the year.
Sure enough, three months of deteriorating data and a collapsing stock market saw him change his tune. ‘The Fed will be patient’, Mr Powell said on January 4. Wind the clock forward to last month’s central bank rate-setting meeting and the Fed chair has accepted that the next move for US interest rates is down. The market expects more than a full percentage point reduction within the next 12 months.
It is testament to the power of the Fed that its policy U-turn has been enough to offset the folly of Donald Trump’s destructive trade policy. Investors are looking at Jay Powell’s change of course and remembering Alan Greenspan’s rate-cuts in 1995 and 1998. Those kept a long-in-the-tooth economic and stock market cycle alive until the bursting of the dot.com bubble in 2000 left the Fed struggling to catch up.
The weather was wrong to be so gloomy in December; by the same token, is it deluding itself today with its mid-year jollity? Is Saturday’s overheating the better analogy?
It’s probably right to be cautiously optimistic as we head into the second half. My analyst colleagues see positive, but slower growth in earnings this year. Valuations outside the US are not excessive. Indeed, in Japan, Europe and the UK they are outright cheap by historic standards and when measured against the $13trn of bonds which today offer a negative yield (yes, you are paying for the privilege of lending to the German government).
The counter argument is that at some point in the next couple of years the US will probably drag the rest of the world into a recession. Stock markets have historically turned down between eight and 13 months ahead of the actual economic slowdown. That suggests we are in the last knockings of this long bull market. The evidence from the past, however, is that the final push can give investors their best gains. It is expensive and painful to miss out on the end of a market rally.
If you are looking for warning flags in the half-year report card, you might focus on an asset that has not been among the market’s best performers for a very long time. Gold has found its shine again in 2019, up 11% by the end of June, when it hit a six-year high. Gold is seen as a safe haven in turbulent times and rises when investors fear the return of inflation. The Fed kicking off a wage-price spiral to end the bull market? Maybe not pathetic, but surely a fallacy.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.