Beaufort Analysis No. 311 – Which Direction?
When markets closed for the year last Monday, most investors would have been pleased to see the back of 2018, well, the latter part of it anyway. In their worst performances since the financial crisis in 2008, the FTSE 100 index fell 12.5%, the Dow Jones fell 5.6% and the S&P 500 was down 6.2%; and this is despite registering all-time highs earlier in the year. Elsewhere, Europe’s Stoxx 600 index fell 13% and Japan’s Nikkei fell 12% throughout 2018. The index of the UK’s smaller companies, by capitalisation, the FTSE 250, fell 19.8%, almost registering a bear market. But by far the worst annual performance of the major indices was China’s Shanghai composite index which fell over 25% as a result of Donald Trump’s imposed tariffs, which have latterly started to impact on economic activity. Last Friday most indices rebounded, however overall, December was another volatile month which saw some of the largest daily movements in history.
It is fair to say that the markets are currently struggling to find a direction. Disappointing data from Asia showed that China’s manufacturing is now in contraction and technology-weighted far-eastern indices were affected further after Apple’s shock revenue warning due to weaker Chinese demand, as a result of the slowing economy and strength of the US dollar. Apple, which became the world’s first $1trillion company three months ago, has now lost over 35% of its value.
In December, the Federal Reserve raised US interest rates for the fourth time in 2018, as expected, to a range of 2.25% to 2.5%, and indicated two more hikes this year. However, at a news conference last Friday Chairman Jerome Powell conveyed a more cautionary approach in light of low inflation, weakening economic data and market volatility and Wall Street is now betting that a looming slowdown in economic growth will prevent the Fed from raising interest rates at all this year, with some investors actually thinking a rate cut is more likely. The Dow, already buoyed by better-than-expected jobs data on Friday, increased by a further 2% on the news.
It is expected that some volatility will continue, certainly for the UK, until we have a resolution to the current Brexit impasse and we are clearer on the outcome. However, the UK equity market is cheap in comparison to other stock markets, having underperformed since 2015. Also, President Trump and President Xi Jinping of China have agreed to work together towards a truce on trade. Recent talks resulted in the tariffs on $200bn worth of Chinese goods remaining at 10%, rather than the 25% Trump had originally promised for 1st January, and there is more optimism that the two sides can reach a solution. It remains to be seen where markets will go from here even though we have already sustained a significant fall over the last three months. History has shown good recoveries after negative years and bounces from December declines, however, we remain cautious for the time being and hope for positive news in the coming months.